UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C.
20549
Form 10-Q
|
|
|
|
|
|
þ
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
For the quarterly
period ended September 30, 2010
|
|
OR
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
For the transition period from
to
|
Commission File
No. 001-32876
Wyndham Worldwide
Corporation
(Exact name of registrant as
specified in its charter)
|
|
|
Delaware
|
|
20-0052541
|
(State or other jurisdiction
of incorporation or organization)
|
|
(I.R.S. Employer
Identification No.)
|
|
|
|
22 Sylvan Way
Parsippany, New Jersey
(Address of principal
executive offices)
|
|
07054
(Zip Code)
|
|
|
|
(973) 753-6000
(Registrants 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. (Check one):
|
|
|
|
Large
accelerated
filer þ
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller reporting
company o
|
(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The number of shares outstanding of the issuers common
stock was 174,966,620 shares as of September 30, 2010.
PART IFINANCIAL
INFORMATION
|
|
Item 1.
|
Financial
Statements (Unaudited).
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Wyndham Worldwide Corporation
Parsippany, New Jersey
We have reviewed the accompanying consolidated balance sheet of
Wyndham Worldwide Corporation and subsidiaries (the
Company) as of September 30, 2010, the related
consolidated statements of income for the three-month and
nine-month periods ended September 30, 2010 and 2009, and
the related consolidated statements of stockholders equity
and cash flows for the nine-month periods ended
September 30, 2010 and 2009. These interim consolidated
financial statements are the responsibility of the
Companys 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, 2009, and the related consolidated statements
of income, stockholders equity, and cash flows for the
year then ended (not presented herein); and in our report dated
February 19, 2010, 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, 2009 is fairly stated, in all
material respects, in relation to the consolidated balance sheet
from which it has been derived.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
October 28, 2010
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fees and membership
|
|
$
|
464
|
|
|
$
|
445
|
|
|
$
|
1,298
|
|
|
$
|
1,241
|
|
Vacation ownership interest sales
|
|
|
308
|
|
|
|
285
|
|
|
|
796
|
|
|
|
766
|
|
Franchise fees
|
|
|
142
|
|
|
|
126
|
|
|
|
353
|
|
|
|
342
|
|
Consumer financing
|
|
|
107
|
|
|
|
108
|
|
|
|
318
|
|
|
|
325
|
|
Other
|
|
|
44
|
|
|
|
52
|
|
|
|
149
|
|
|
|
163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
1,065
|
|
|
|
1,016
|
|
|
|
2,914
|
|
|
|
2,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
410
|
|
|
|
386
|
|
|
|
1,179
|
|
|
|
1,145
|
|
Cost of vacation ownership interests
|
|
|
52
|
|
|
|
54
|
|
|
|
138
|
|
|
|
136
|
|
Consumer financing interest
|
|
|
27
|
|
|
|
35
|
|
|
|
80
|
|
|
|
102
|
|
Marketing and reservation
|
|
|
149
|
|
|
|
149
|
|
|
|
410
|
|
|
|
423
|
|
General and administrative
|
|
|
101
|
|
|
|
140
|
|
|
|
394
|
|
|
|
398
|
|
Asset impairments
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
|
|
8
|
|
Restructuring costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
|
|
Depreciation and amortization
|
|
|
43
|
|
|
|
46
|
|
|
|
128
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
786
|
|
|
|
810
|
|
|
|
2,333
|
|
|
|
2,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
279
|
|
|
|
206
|
|
|
|
581
|
|
|
|
445
|
|
Other income, net
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(6
|
)
|
|
|
(4
|
)
|
Interest expense
|
|
|
47
|
|
|
|
34
|
|
|
|
133
|
|
|
|
79
|
|
Interest income
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
235
|
|
|
|
175
|
|
|
|
457
|
|
|
|
375
|
|
Provision for income taxes
|
|
|
79
|
|
|
|
71
|
|
|
|
157
|
|
|
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
156
|
|
|
$
|
104
|
|
|
$
|
300
|
|
|
$
|
220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.88
|
|
|
$
|
0.58
|
|
|
$
|
1.68
|
|
|
$
|
1.23
|
|
Diluted
|
|
|
0.84
|
|
|
|
0.57
|
|
|
|
1.62
|
|
|
|
1.21
|
|
See Notes to Consolidated Financial Statements.
3
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
170
|
|
|
$
|
155
|
|
Trade receivables, net
|
|
|
349
|
|
|
|
404
|
|
Vacation ownership contract receivables, net
|
|
|
285
|
|
|
|
289
|
|
Inventory
|
|
|
336
|
|
|
|
354
|
|
Prepaid expenses
|
|
|
102
|
|
|
|
116
|
|
Deferred income taxes
|
|
|
144
|
|
|
|
189
|
|
Other current assets
|
|
|
216
|
|
|
|
233
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,602
|
|
|
|
1,740
|
|
|
|
|
|
|
|
|
|
|
Long-term vacation ownership contract receivables, net
|
|
|
2,727
|
|
|
|
2,792
|
|
Non-current inventory
|
|
|
902
|
|
|
|
953
|
|
Property and equipment, net
|
|
|
942
|
|
|
|
953
|
|
Goodwill
|
|
|
1,432
|
|
|
|
1,386
|
|
Trademarks, net
|
|
|
722
|
|
|
|
660
|
|
Franchise agreements and other intangibles, net
|
|
|
423
|
|
|
|
391
|
|
Other non-current assets
|
|
|
463
|
|
|
|
477
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
9,213
|
|
|
$
|
9,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Securitized vacation ownership debt
|
|
$
|
187
|
|
|
$
|
209
|
|
Current portion of long-term debt
|
|
|
32
|
|
|
|
175
|
|
Accounts payable
|
|
|
215
|
|
|
|
260
|
|
Deferred income
|
|
|
380
|
|
|
|
417
|
|
Due to former Parent and subsidiaries
|
|
|
64
|
|
|
|
245
|
|
Accrued expenses and other current liabilities
|
|
|
643
|
|
|
|
579
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,521
|
|
|
|
1,885
|
|
|
|
|
|
|
|
|
|
|
Long-term securitized vacation ownership debt
|
|
|
1,428
|
|
|
|
1,298
|
|
Long-term debt
|
|
|
1,969
|
|
|
|
1,840
|
|
Deferred income taxes
|
|
|
964
|
|
|
|
1,137
|
|
Deferred income
|
|
|
215
|
|
|
|
267
|
|
Due to former Parent and subsidiaries
|
|
|
39
|
|
|
|
63
|
|
Other non-current liabilities
|
|
|
166
|
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
6,302
|
|
|
|
6,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 209,692,008 in 2010 and
205,891,254 shares in 2009
|
|
|
2
|
|
|
|
2
|
|
Treasury stock, at cost34,993,945 shares in 2010 and
27,284,823 in 2009
|
|
|
(1,061
|
)
|
|
|
(870
|
)
|
Additional paid-in capital
|
|
|
3,903
|
|
|
|
3,733
|
|
Accumulated deficit
|
|
|
(82
|
)
|
|
|
(315
|
)
|
Accumulated other comprehensive income
|
|
|
149
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
2,911
|
|
|
|
2,688
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
9,213
|
|
|
$
|
9,352
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
4
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
300
|
|
|
$
|
220
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
128
|
|
|
|
134
|
|
Provision for loan losses
|
|
|
258
|
|
|
|
346
|
|
Deferred income taxes
|
|
|
63
|
|
|
|
80
|
|
Stock-based compensation
|
|
|
30
|
|
|
|
28
|
|
Excess tax benefits from stock-based compensation
|
|
|
(14
|
)
|
|
|
|
|
Asset impairments
|
|
|
4
|
|
|
|
8
|
|
Non-cash interest
|
|
|
51
|
|
|
|
33
|
|
Non-cash restructuring
|
|
|
|
|
|
|
15
|
|
Net change in assets and liabilities, excluding the impact of
acquisitions and dispositions:
|
|
|
|
|
|
|
|
|
Trade receivables
|
|
|
80
|
|
|
|
117
|
|
Vacation ownership contract receivables
|
|
|
(163
|
)
|
|
|
(139
|
)
|
Inventory
|
|
|
56
|
|
|
|
(26
|
)
|
Prepaid expenses
|
|
|
12
|
|
|
|
17
|
|
Other current assets
|
|
|
13
|
|
|
|
36
|
|
Accounts payable, accrued expenses and other current liabilities
|
|
|
(60
|
)
|
|
|
(58
|
)
|
Due to former Parent and subsidiaries, net
|
|
|
(161
|
)
|
|
|
(43
|
)
|
Deferred income
|
|
|
(93
|
)
|
|
|
(225
|
)
|
Other, net
|
|
|
24
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
528
|
|
|
|
569
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
Property and equipment additions
|
|
|
(100
|
)
|
|
|
(109
|
)
|
Net assets acquired, net of cash acquired
|
|
|
(159
|
)
|
|
|
|
|
Equity investments and development advances
|
|
|
(9
|
)
|
|
|
(6
|
)
|
Proceeds from asset sales
|
|
|
20
|
|
|
|
3
|
|
Increase in securitization restricted cash
|
|
|
(7
|
)
|
|
|
(28
|
)
|
Decrease/(increase) in escrow deposit restricted cash
|
|
|
(6
|
)
|
|
|
1
|
|
Other, net
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(260
|
)
|
|
|
(138
|
)
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds from securitized borrowings
|
|
|
1,252
|
|
|
|
934
|
|
Principal payments on securitized borrowings
|
|
|
(1,144
|
)
|
|
|
(1,141
|
)
|
Proceeds from non-securitized borrowings
|
|
|
1,099
|
|
|
|
790
|
|
Principal payments on non-securitized borrowings
|
|
|
(1,534
|
)
|
|
|
(1,387
|
)
|
Proceeds from note issuances
|
|
|
494
|
|
|
|
460
|
|
Repurchase of convertible notes
|
|
|
(197
|
)
|
|
|
|
|
Proceeds from/(purchase of) call options
|
|
|
105
|
|
|
|
(42
|
)
|
Proceeds from issuance of warrants/(repurchase of warrants)
|
|
|
(75
|
)
|
|
|
11
|
|
Dividends to shareholders
|
|
|
(65
|
)
|
|
|
(22
|
)
|
Repurchase of common stock
|
|
|
(188
|
)
|
|
|
|
|
Proceeds from stock option exercises
|
|
|
36
|
|
|
|
|
|
Excess tax benefits from stock-based compensation
|
|
|
14
|
|
|
|
|
|
Debt issuance costs
|
|
|
(29
|
)
|
|
|
(16
|
)
|
Other, net
|
|
|
(23
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(255
|
)
|
|
|
(411
|
)
|
|
|
|
|
|
|
|
|
|
Effect of changes in exchange rates on cash and cash equivalents
|
|
|
2
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
15
|
|
|
|
34
|
|
Cash and cash equivalents, beginning of period
|
|
|
155
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
170
|
|
|
$
|
170
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury
|
|
|
Additional
|
|
|
|
|
|
Accumulated
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Stock
|
|
|
Paid-in
|
|
|
|
|
|
Other
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Accumulated Deficit
|
|
|
Comprehensive Income
|
|
|
Equity
|
|
|
Balance as of December 31, 2009
|
|
|
206
|
|
|
$
|
2
|
|
|
|
(27
|
)
|
|
$
|
(870
|
)
|
|
$
|
3,733
|
|
|
$
|
(315
|
)
|
|
$
|
138
|
|
|
$
|
2,688
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment, net of tax benefit of $14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
Reclassification of unrealized loss on cash flow hedge, net of
tax benefit of $6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
Unrealized gains on cash flow hedges, net of tax of $1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
311
|
|
Exercise of stock options
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
Issuance of shares for RSU vesting
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
Reversal of net deferred tax liabilities from former Parent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
190
|
|
Repurchase of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(75
|
)
|
|
|
|
|
|
|
|
|
|
|
(75
|
)
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
(191
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(191
|
)
|
Change in excess tax benefit on equity awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67
|
)
|
|
|
|
|
|
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2010
|
|
|
210
|
|
|
$
|
2
|
|
|
|
(35
|
)
|
|
$
|
(1,061
|
)
|
|
$
|
3,903
|
|
|
$
|
(82
|
)
|
|
$
|
149
|
|
|
$
|
2,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury
|
|
|
Additional
|
|
|
|
|
|
Accumulated
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Stock
|
|
|
Paid-in
|
|
|
|
|
|
Other
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Accumulated Deficit
|
|
|
Comprehensive Income
|
|
|
Equity
|
|
|
Balance as of December 31, 2008
|
|
|
205
|
|
|
$
|
2
|
|
|
|
(27
|
)
|
|
$
|
(870
|
)
|
|
$
|
3,690
|
|
|
$
|
(578
|
)
|
|
$
|
98
|
|
|
$
|
2,342
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
220
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment, net of tax of $29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
|
|
|
|
|
|
Unrealized gains on cash flow hedges, net of tax of $8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
272
|
|
Issuance of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
Issuance of shares for RSU vesting
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
Change in excess tax benefit on equity awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2009
|
|
|
206
|
|
|
$
|
2
|
|
|
|
(27
|
)
|
|
$
|
(870
|
)
|
|
$
|
3,725
|
|
|
$
|
(380
|
)
|
|
$
|
150
|
|
|
$
|
2,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
6
Wyndham Worldwide Corporation (Wyndham or the
Company) is a global provider of hospitality products and
services. 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 managements
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 Companys 2009 Consolidated Financial
Statements included in its Annual Report filed on
Form 10-K
with the Securities and Exchange Commission (SEC) on
February 19, 2010.
Business
Description
The Company operates in the following business segments:
|
|
|
|
·
|
Lodgingfranchises hotels in the upscale, midscale,
economy and extended stay segments of the lodging industry and
provides hotel management services for full-service hotels
globally.
|
|
|
·
|
Vacation Exchange and Rentalsprovides vacation
exchange products and services to owners of intervals of
vacation ownership interests (VOIs) and markets
vacation rental properties primarily on behalf of independent
owners.
|
|
|
·
|
Vacation Ownershipdevelops, markets and sells VOIs
to individual consumers, provides consumer financing in
connection with the sale of VOIs and provides property
management services at resorts.
|
Significant
Accounting Policies
Intangible Assets. The Company annually
(during the fourth quarter of each year subsequent to completing
its annual forecasting process), or more frequently if
circumstances prescribed by the guidance for goodwill and other
intangible assets are present, reviews its goodwill and other
indefinite-lived intangible assets recorded in connection with
business combinations for impairment.
Allowance for Loan Losses. In the
Companys Vacation Ownership segment, the Company provides
for estimated vacation ownership contract receivable defaults at
the time of VOI sales by recording a provision for loan losses
as a reduction of VOI sales on the Consolidated Statements of
Income. The Company assesses the adequacy of the allowance for
loan losses based on the historical performance of similar
vacation ownership contract receivables using a technique
referred to as static pool analysis, which tracks defaults for
each years sales over the entire life of those contract
receivables. The Company considers current defaults, past due
aging, historical write-offs of contracts, consumer credit
scores (FICO scores) in the assessment of borrowers credit
strength and expected loan performance. The Company also
considers whether the historical economic conditions are
comparable to current economic conditions. If current conditions
differ from the conditions in effect when the historical
experience was generated, the Company adjusts the allowance for
loan losses to reflect the expected effects of the current
environment on the collectability of its vacation ownership
contract receivables.
Restricted Cash. The largest portion of the
Companys restricted cash relates to securitizations. The
remaining portion is comprised of cash held in escrow related to
the Companys vacation ownership business and cash held in
all other escrow accounts. Restricted cash related to
securitization was $140 million and $133 million as of
September 30, 2010 and December 31, 2009,
respectively, of which $75 million and $69 million
were recorded within other current assets as of
September 30, 2010 and December 31, 2009,
respectively, and $65 million and $64 million were
recorded within other non-current assets as of
September 30, 2010 and December 31, 2009,
respectively, on the Consolidated Balance Sheets. Restricted
cash related to escrow deposits was $36 million and
$19 million as of
7
September 30, 2010 and December 31, 2009,
respectively, which were recorded within other current assets as
of September 30, 2010 and December 31, 2009,
respectively, on the Consolidated Balance Sheets.
Recently
Issued Accounting Pronouncements
Transfers and Servicing. In June 2009, the
Financial Accounting Standards Board (FASB) issued
guidance on transfers and servicing of financial assets. The
guidance eliminates the concept of a Qualifying Special-Purpose
Entity, changes the requirements for derecognizing financial
assets and requires additional disclosures in order to enhance
information reported to users of financial statements by
providing greater transparency about transfers of financial
assets, including securitization transactions, and an
entitys continuing involvement in and exposure to the
risks related to transferred financial assets. The guidance is
effective for interim or annual reporting periods beginning
after November 15, 2009. The Company adopted the guidance
on January 1, 2010, as required. See
Note 7Long-Term Debt and Borrowing Arrangements for
additional disclosure required by such guidance.
Consolidation. In June 2009, the FASB issued
guidance that modifies how a company determines when an entity
that is insufficiently capitalized or is not controlled through
voting (or similar rights) should be consolidated. The guidance
clarifies that the determination of whether a company is
required to consolidate an entity is based on, among other
things, an entitys purpose and design and a companys
ability to direct the activities of the entity that most
significantly impact the entitys economic performance. The
guidance requires an ongoing reassessment of whether a company
is the primary beneficiary of a variable interest entity,
additional disclosures about a companys involvement in
variable interest entities and any significant changes in risk
exposure due to that involvement. The guidance is effective for
interim or annual reporting periods beginning after
November 15, 2009. The Company adopted the guidance on
January 1, 2010, as required. See
Note 7Long-Term Debt and Borrowing Arrangements for
additional disclosure required by such guidance regarding the
consolidation of the Companys bankruptcy-remote special
purpose entities (SPEs) associated with its vacation
ownership contract receivables securitizations.
The computation of basic and diluted earnings per share
(EPS) is based on the Companys net income
available to common stockholders divided by the basic weighted
average number of common shares and diluted weighted average
number of common shares, respectively.
The following table sets forth the computation of basic and
diluted EPS (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Net income
|
|
$
|
156
|
|
|
$
|
104
|
|
|
$
|
300
|
|
|
$
|
220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
177
|
|
|
|
179
|
|
|
|
179
|
|
|
|
178
|
|
Stock options and restricted stock units (RSU)
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
3
|
|
Warrants
(*)
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
184
|
|
|
|
183
|
|
|
|
186
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.88
|
|
|
$
|
0.58
|
|
|
$
|
1.68
|
|
|
$
|
1.23
|
|
Diluted
|
|
|
0.84
|
|
|
|
0.57
|
|
|
|
1.62
|
|
|
|
1.21
|
|
|
|
|
|
(*)
|
Represents the dilutive effect of warrants to purchase shares of
the Companys common stock related to the May 2009 issuance
of the Companys convertible notes (see
Note 7Long-Term Debt and Borrowing Arrangements).
|
The computations of diluted EPS for both the three and nine
months ended September 30, 2010 do not include
approximately 4 million stock options and stock-settled
stock appreciation rights (SSARs) as the effect of
their inclusion would have been anti-dilutive to EPS. The
computations of diluted EPS for both the three and nine months
ended September 30, 2009 do not include warrants to
purchase approximately 18 million shares of the
Companys common stock related to the May 2009 issuance of
the Companys Convertible Notes (see
Note 7Long-Term Debt and Borrowing Arrangements) and
approximately 9 million stock options and SSARs as the
effect of their inclusion would have been anti-dilutive to EPS.
8
Dividend
Payments
During each of the quarterly periods ended March 31, June
30 and September 30, 2010, the Company paid cash dividends
of $0.12 per share ($65 million in the aggregate). During
each of the quarterly periods ended March 31, June 30 and
September 30, 2009, the Company paid cash dividends of
$0.04 per share ($22 million in the aggregate).
Stock
Repurchase Program
On August 20, 2007, the Companys Board of Directors
authorized a stock repurchase program that enables it to
purchase up to $200 million of its common stock. Under such
program, the Company repurchased 2,155,783 shares at an
average price of $26.89 for a cost of $58 million and
repurchase capacity increased $13 million from proceeds
received from stock option exercises as of December 31,
2009. On July 22, 2010, the Companys Board of
Directors increased the authorization by $300 million.
During the nine months ended September 30, 2010, the
Company repurchased 7,709,122 shares at an average price of
$24.78 for a cost of $191 million and repurchase capacity
increased $36 million from proceeds received from stock
option exercises. As of September 30, 2010, the Company
repurchased a total of 9,864,905 shares at an average price
of $25.24 for a cost of $249 million under its current
authorization and had $300 million remaining availability
in its program.
Assets acquired and liabilities assumed in business combinations
were recorded on the Consolidated Balance Sheets as of the
respective acquisition dates based upon their estimated fair
values at such dates. The results of operations of businesses
acquired by the Company have been included in the Consolidated
Statement of Income since their respective dates of acquisition.
The excess of the purchase price over the estimated fair values
of the underlying assets acquired and liabilities assumed was
allocated to goodwill. In certain circumstances, the allocations
of the excess purchase price are based upon preliminary
estimates and assumptions. Accordingly, the allocations may be
subject to revision when the Company receives final information,
including appraisals and other analyses. Any revisions to the
fair values during the allocation period will be recorded by the
Company as further adjustments to the purchase price
allocations. Although, in certain circumstances, the Company has
substantially integrated the operations of its acquired
businesses, additional future costs relating to such integration
may occur. These costs may result from integrating operating
systems, relocating employees, closing facilities, reducing
duplicative efforts and exiting and consolidating other
activities. These costs will be recorded on the Consolidated
Statement of Income as expenses.
Hoseasons. On March 1, 2010, the Company
completed the acquisition of Hoseasons Holdings Ltd.
(Hoseasons), a European vacation rentals business,
for $59 million in cash, net of cash acquired. The purchase
price allocation resulted in the recognition of $38 million
of goodwill, $30 million of definite-lived intangible
assets with a weighted average life of 18 years and
$16 million of trademarks, all of which were assigned to
the Companys Vacation Exchange and Rentals segment.
Management believes that this acquisition offers a strategic fit
within the Companys European rentals business and an
opportunity to continue to grow the Companys
fee-for-service
businesses.
Tryp. On June 30, 2010, the Company
completed the acquisition of the Tryp hotel brand
(Tryp) for $43 million in cash. The purchase
price allocation resulted in the recognition of $3 million
of goodwill, $3 million of franchise agreements with a
weighted average life of 20 years and $36 million of
trademarks, all of which were assigned to the Companys
Lodging segment. This acquisition increases the Companys
footprint in Europe and Latin America and management believes it
presents enhanced growth opportunities for its lodging business
in North America.
ResortQuest. On September 30, 2010, the
Company completed the acquisition of ResortQuest, a
U.S. vacation rentals business, for $54 million in
cash, net of cash acquired. The preliminary purchase price
allocation resulted in the recognition of $15 million of
goodwill, $16 million of definite-lived intangible assets
with a weighted average life of 10 years and
$9 million of trademarks, all of which were assigned to the
Companys Vacation Exchange and Rentals segment. Management
believes that this acquisition provides the Company with an
opportunity to build a growth platform in the U.S. rentals
market.
9
Intangible assets consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010
|
|
|
As of December 31, 2009
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Unamortized Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
1,432
|
|
|
|
|
|
|
|
|
|
|
$
|
1,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
722
|
|
|
|
|
|
|
|
|
|
|
$
|
660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise agreements
|
|
$
|
634
|
|
|
$
|
313
|
|
|
$
|
321
|
|
|
$
|
630
|
|
|
$
|
298
|
|
|
$
|
332
|
|
Other
|
|
|
140
|
|
|
|
38
|
|
|
|
102
|
|
|
|
94
|
|
|
|
35
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
774
|
|
|
$
|
351
|
|
|
$
|
423
|
|
|
$
|
724
|
|
|
$
|
333
|
|
|
$
|
391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The changes in the carrying amount of goodwill are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Goodwill
|
|
|
|
|
|
Balance at
|
|
|
|
January 1,
|
|
|
Acquired
|
|
|
Foreign
|
|
|
September 30,
|
|
|
|
2010
|
|
|
During 2010
|
|
|
Exchange
|
|
|
2010
|
|
|
Lodging
|
|
$
|
297
|
|
|
$
|
3
|
(a)
|
|
$
|
|
|
|
$
|
300
|
|
Vacation Exchange and Rentals
|
|
|
1,089
|
|
|
|
53
|
(b)
|
|
|
(10
|
)
|
|
|
1,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company
|
|
$
|
1,386
|
|
|
$
|
56
|
|
|
$
|
(10
|
)
|
|
$
|
1,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Relates to the acquisition of Tryp (see
Note 3Acquisitions).
|
|
|
(b)
|
Relates to the acquisitions of Hoseasons and ResortQuest (see
Note 3Acquisitions).
|
Amortization expense relating to amortizable intangible assets
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Franchise agreements
|
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
15
|
|
|
$
|
15
|
|
Other
|
|
|
1
|
|
|
|
2
|
|
|
|
5
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (*)
|
|
$
|
6
|
|
|
$
|
7
|
|
|
$
|
20
|
|
|
$
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
Included as a component of depreciation and amortization on the
Companys Consolidated Statements of Income.
|
Based on the Companys amortizable intangible assets as of
September 30, 2010, the Company expects related
amortization expense as follows:
|
|
|
|
|
|
|
Amount
|
|
Remainder of 2010
|
|
$
|
7
|
|
2011
|
|
|
29
|
|
2012
|
|
|
28
|
|
2013
|
|
|
26
|
|
2014
|
|
|
26
|
|
2015
|
|
|
26
|
|
10
|
|
5.
|
Vacation
Ownership Contract Receivables
|
The Company generates vacation ownership contract receivables by
extending financing to the purchasers of VOIs. Current and
long-term vacation ownership contract receivables, net consisted
of:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Current vacation ownership contract receivables:
|
|
|
|
|
|
|
|
|
Securitized
|
|
$
|
251
|
|
|
$
|
244
|
|
Non-securitized
|
|
|
68
|
|
|
|
52
|
|
Secured
(*)
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
319
|
|
|
|
324
|
|
Less: Allowance for loan losses
|
|
|
(34
|
)
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
Current vacation ownership contract receivables, net
|
|
$
|
285
|
|
|
$
|
289
|
|
|
|
|
|
|
|
|
|
|
Long-term vacation ownership contract receivables:
|
|
|
|
|
|
|
|
|
Securitized
|
|
$
|
2,458
|
|
|
$
|
2,347
|
|
Non-securitized
|
|
|
599
|
|
|
|
546
|
|
Secured
(*)
|
|
|
|
|
|
|
234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,057
|
|
|
|
3,127
|
|
Less: Allowance for loan losses
|
|
|
(330
|
)
|
|
|
(335
|
)
|
|
|
|
|
|
|
|
|
|
Long-term vacation ownership contract receivables, net
|
|
$
|
2,727
|
|
|
$
|
2,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
As of December 31, 2009, such receivables collateralized
the Companys
364-day, AUD
213 million, secured, revolving foreign credit facility,
which was paid down and terminated during March 2010 (see
Note 7Long-Term Debt and Borrowing Arrangements).
|
During the three and nine months ended September 30, 2010,
the Companys securitized vacation ownership contract
receivables generated interest income of $88 million and
$249 million, respectively. During the three and nine
months ended September 30, 2009, such amounts were
$85 million and $248 million, respectively.
Principal payments that are contractually due on the
Companys vacation ownership contract receivables during
the next twelve months are classified as current on the
Companys Consolidated Balance Sheets. During the nine
months ended September 30, 2010 and 2009, the Company
originated vacation ownership contract receivables of
$744 million and $718 million, respectively, and
received principal collections of $581 million and
$579 million, respectively. The weighted average interest
rate on outstanding vacation ownership contract receivables was
13.1% and 13.0% at September 30, 2010 and December 31,
2009, respectively.
The activity in the allowance for loan losses on vacation
ownership contract receivables was as follows:
|
|
|
|
|
|
|
Amount
|
|
|
Allowance for loan losses as of January 1, 2010
|
|
$
|
(370
|
)
|
Provision for loan losses
|
|
|
(258
|
)
|
Contract receivables written-off
|
|
|
264
|
|
|
|
|
|
|
Allowance for loan losses as of September 30, 2010
|
|
$
|
(364
|
)
|
|
|
|
|
|
In accordance with the guidance for accounting for real estate
timesharing transactions, the Company recorded the provision for
loan losses of $85 million and $258 million as a
reduction of net revenues during the three and nine months ended
September 30, 2010, respectively, and $117 million and
$346 million during the three and nine months ended
September 30, 2009, respectively.
Inventory consisted of:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Land held for VOI development
|
|
$
|
119
|
|
|
$
|
119
|
|
VOI construction in process
|
|
|
256
|
|
|
|
352
|
|
Completed inventory and vacation credits
|
|
|
863
|
|
|
|
836
|
|
|
|
|
|
|
|
|
|
|
Total inventory
|
|
|
1,238
|
|
|
|
1,307
|
|
Less: Current portion
|
|
|
336
|
|
|
|
354
|
|
|
|
|
|
|
|
|
|
|
Non-current inventory
|
|
$
|
902
|
|
|
$
|
953
|
|
|
|
|
|
|
|
|
|
|
11
Inventory that the Company expects to sell within the next
twelve months is classified as current on the Companys
Consolidated Balance Sheets.
|
|
7.
|
Long-Term
Debt and Borrowing Arrangements
|
The Companys indebtedness consisted of:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Securitized vacation ownership debt:
(a)
|
|
|
|
|
|
|
|
|
Term notes
|
|
$
|
1,400
|
|
|
$
|
1,112
|
|
Bank conduit facility
(b)
|
|
|
215
|
|
|
|
395
|
|
|
|
|
|
|
|
|
|
|
Total securitized vacation ownership debt
|
|
|
1,615
|
|
|
|
1,507
|
|
Less: Current portion of securitized vacation ownership debt
|
|
|
187
|
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
Long-term securitized vacation ownership debt
|
|
$
|
1,428
|
|
|
$
|
1,298
|
|
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
6.00% senior unsecured notes (due December 2016)
(c)
|
|
$
|
798
|
|
|
$
|
797
|
|
Term loan
(d)
|
|
|
|
|
|
|
300
|
|
Revolving credit facility (due October 2013)
(e)
|
|
|
26
|
|
|
|
|
|
9.875% senior unsecured notes (due May 2014)
(f)
|
|
|
240
|
|
|
|
238
|
|
3.50% convertible notes (due May 2012)
(g)
|
|
|
289
|
|
|
|
367
|
|
7.375% senior unsecured notes (due March 2020)
(h)
|
|
|
247
|
|
|
|
|
|
5.75% senior unsecured notes (due February 2018)
(i)
|
|
|
247
|
|
|
|
|
|
Vacation ownership bank borrowings
(j)
|
|
|
|
|
|
|
153
|
|
Vacation rentals capital leases
(k)
|
|
|
120
|
|
|
|
133
|
|
Other
|
|
|
34
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
2,001
|
|
|
|
2,015
|
|
Less: Current portion of long-term debt
|
|
|
32
|
|
|
|
175
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
1,969
|
|
|
$
|
1,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Represents debt that is securitized through bankruptcy-remote
SPEs. Such SPEs are legally separate from the Company. The
assets of these SPEs are not available to creditors of the
Company and are legally not assets of the Company.
|
|
|
(b)
|
Represents a
364-day,
$600 million, non-recourse vacation ownership bank conduit
facility, with a term through October 2010 whose capacity is
subject to the Companys ability to provide additional
assets to collateralize the facility. As of September 30,
2010, the total available capacity of the facility was
$385 million. See Note 17Subsequent Events for
further information.
|
|
|
(c)
|
The balance as of September 30, 2010 represents
$800 million aggregate principal less $2 million of
unamortized discount.
|
|
|
(d)
|
The term loan facility was fully repaid during March 2010.
|
|
|
(e)
|
The revolving credit facility has a total capacity of
$950 million, which includes availability for letters of
credit. As of September 30, 2010, the Company had
$28 million of letters of credit outstanding and, as such,
the total available capacity of the revolving credit facility
was $896 million.
|
|
|
|
|
(f)
|
Represents senior unsecured notes issued by the Company during
May 2009. The balance as of September 30, 2010 represents
$250 million aggregate principal less $10 million of
unamortized discount.
|
|
|
|
|
(g)
|
Represents convertible notes issued by the Company during May
2009, which includes debt principal, less unamortized discount,
and a liability related to a bifurcated conversion feature.
During the third quarter of 2010, the Company repurchased a
portion of these convertible notes (see
3.50% Convertible Notes below for further
description). The following table details the components of the
convertible notes:
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
Debt principal
|
|
$
|
138
|
|
|
$
|
230
|
|
Unamortized discount
|
|
|
(17
|
)
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
Debt less discount
|
|
|
121
|
|
|
|
191
|
|
Fair value of bifurcated conversion feature
(*)
|
|
|
168
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
Convertible notes
|
|
$
|
289
|
|
|
$
|
367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
The Company also has an asset with a fair value equal to the
bifurcated conversion feature, which represents cash-settled
call options that the Company purchased concurrent with the
issuance of the convertible notes (Bifurcated Conversion
Feature).
|
|
|
|
|
(h)
|
Represents senior unsecured notes issued by the Company during
February 2010. The balance as of September 30, 2010
represents $250 million aggregate principal less
$3 million of unamortized discount.
|
|
|
|
|
(i)
|
Represents senior unsecured notes issued by the Company during
September 2010. The balance as of September 30, 2010
represents $250 million aggregate principal less
$3 million of unamortized discount.
|
|
|
(j)
|
Represents a
364-day, AUD
213 million, secured, revolving foreign credit facility,
which was paid down and terminated during March 2010.
|
|
|
|
|
(k)
|
Represents capital lease obligations with corresponding assets
classified within property and equipment on the Companys
Consolidated Balance Sheets.
|
12
2010
Debt Issuances
7.375% Senior Unsecured Notes. On
February 25, 2010, the Company issued senior unsecured
notes, with face value of $250 million and bearing interest
at a rate of 7.375%, for net proceeds of $247 million.
Interest began accruing on February 25, 2010 and is payable
semi-annually in arrears on March 1 and September 1 of each
year, commencing on September 1, 2010. The notes will
mature on March 1, 2020 and are redeemable at the
Companys option at any time, in whole or in part, at the
stated redemption prices plus accrued interest through the
redemption date. These notes rank equally in right of payment
with all of the Companys other senior unsecured
indebtedness.
Sierra Timeshare
2010-1
Receivables Funding, LLC. On March 12, 2010,
the Company closed a series of term notes payable, Sierra
Timeshare
2010-1
Receivables Funding LLC, in the initial principal amount of
$300 million. These borrowings bear interest at a coupon
rate of 4.48% and are secured by vacation ownership contract
receivables. As of September 30, 2010, the Company had
$208 million of outstanding borrowings under these term
notes.
Revolving Credit Facility. On March 29,
2010, the Company replaced its five-year $900 million
revolving credit facility with a $950 million revolving
credit facility that expires on October 1, 2013. This
facility is subject to a fee of 50 basis points based on
total capacity and bears interest at LIBOR plus 250 basis
points. The interest rate of this facility is dependent on the
Companys credit ratings. As of September 30, 2010,
the Company had $26 million of outstanding borrowings and
$28 million of outstanding letters of credit and, as such,
the total available remaining capacity was $896 million.
Premium Yield Facility
2010-A
LLC. On June 14, 2010, the Company closed a
securitization facility, Premium Yield Facility
2010-A LLC,
in the initial principal amount of $185 million. These
borrowings bear interest at a coupon rate of 6.08% and are
secured by vacation ownership contract receivables. As of
September 30, 2010, the Company had $170 million of
outstanding borrowings under this facility.
Sierra Timeshare
2010-2
Receivables Funding, LLC. On July 23, 2010,
the Company closed a series of term notes payable, Sierra
Timeshare
2010-2
Receivables Funding LLC, in the initial principal amount of
$350 million. These borrowings bear interest at a weighted
average coupon rate of 4.11% and are secured by vacation
ownership contract receivables. As of September 30, 2010,
the Company had $309 million of outstanding borrowings
under these term notes.
5.75% Senior Unsecured Notes. On
September 20, 2010, the Company issued senior unsecured
notes, with face value of $250 million and bearing interest
at a rate of 5.75%, for net proceeds of $247 million.
Interest began accruing on September 20, 2010 and is
payable semi-annually in arrears on February 1 and August 1 of
each year, commencing on February 1, 2011. The notes will
mature on February 1, 2018 and are redeemable at the
Companys option at any time, in whole or in part, at the
stated redemption prices plus accrued interest through the
redemption date. These notes rank equally in right of payment
with all of the Companys other senior unsecured
indebtedness.
3.50% Convertible
Notes
During May 2009, the Company issued convertible notes
(Convertible Notes) with face value of
$230 million and bearing interest at a rate of 3.50%.
Concurrent with such issuance, the Company purchased
cash-settled call options (Call Options) and entered
into warrant transactions (Warrants). The agreements
for such transactions contain anti-dilution provisions that
require certain adjustments to be made as a result of all
quarterly cash dividend increases above $0.04 per share that
occur prior to the maturity date of the Convertible Notes, Call
Options and Warrants. During March 2010, the Company increased
its quarterly dividend from $0.04 per share to $0.12 per share.
As a result of the dividend increase and required adjustments,
as of September 30, 2010, the Convertible Notes have a
conversion reference rate of 79.3544 shares of common stock
per $1,000 principal amount (equivalent to a conversion price of
approximately $12.60 per share of the Companys common
stock), the conversion price of the Call Options is $12.60 and
the exercise price of the Warrants is $19.95.
During the third quarter of 2010, the Company repurchased a
portion of its Convertible Notes with a carrying value of
$188 million ($81 million for the portion of
Convertible Notes, including the unamortized discount, and
$107 million for the related Bifurcated Conversion Feature)
for $197 million, which resulted in a loss of
$9 million during the third quarter of 2010. Such
Convertible Notes had a face value of $92 million.
Concurrent with the repurchase, the Company settled (i) a
portion of the Call Options for proceeds of $105 million,
which resulted in an additional loss of $2 million and
(ii) a portion of the Warrants with payments of
$75 million. The Warrants meet the definition of
derivatives under the accounting guidance; however, these
instruments have been determined to be indexed to the
Companys own common stock and, as such, the settlement has
been recorded in stockholders equity on the Companys
Consolidated Balance Sheet. As a result of these transactions,
the Company made net payments of
13
$167 million and incurred total losses of $11 million
during the third quarter of 2010 and reduced the number of
shares related to the Warrants to approximately 11 million
as of September 30, 2010.
Early
Extinguishment of Debt
In connection with the early extinguishment of the term loan
facility during the first quarter of 2010, the Company
effectively terminated a related interest rate swap agreement,
which resulted in the reclassification of a $14 million
unrealized loss from accumulated other comprehensive income to
interest expense during the first quarter of 2010 on the
Companys Consolidated Statement of Income. The Company
incurred an additional $2 million of costs during the first
quarter of 2010 in connection with the early extinguishment of
its term loan and revolving foreign credit facilities, which is
also included within interest expense on the Companys
Consolidated Statement of Income. The Companys revolving
foreign credit facility was paid down with a portion of the
proceeds from the 7.375% senior unsecured notes. The
remaining proceeds were used, in addition to borrowings under
the Companys revolving credit facility, to pay down the
Companys term loan facility.
In connection with the repurchase of a portion of the
Convertible Notes and the settlement of the Call Options, the
Company incurred a loss of $11 million during the third
quarter of 2010, which is included within interest expense on
the Companys Consolidated Statement of Income.
Covenants
The revolving credit facility is subject to covenants including
the maintenance of specific financial ratios. The financial
ratio covenants consist of a minimum consolidated interest
coverage ratio of at least 3.0 to 1.0 as of the measurement date
and a maximum consolidated leverage ratio not to exceed 3.75 to
1.0 on the measurement date. The consolidated interest coverage
ratio is calculated by dividing Consolidated EBITDA (as defined
in the credit agreement) by Consolidated Interest Expense (as
defined in the credit agreement), both as measured on a trailing
12 month basis preceding the measurement date. As of
September 30, 2010, the Companys consolidated
interest coverage ratio was 7.7 times. Consolidated Interest
Expense excludes, among other things, interest expense on any
Securitization Indebtedness (as defined in the credit
agreement). The consolidated leverage ratio is calculated by
dividing Consolidated Total Indebtedness (as defined in the
credit agreement and which excludes, among other things,
Securitization Indebtedness) as of the measurement date by
Consolidated EBITDA as measured on a trailing 12 month
basis preceding the measurement date. As of September 30,
2010, the Companys consolidated leverage ratio was 1.9
times. Covenants in this credit facility also include
limitations on indebtedness of material subsidiaries; liens;
mergers, consolidations, liquidations and dissolutions; sale of
all or substantially all assets; and sale and leaseback
transactions. Events of default in this credit facility include
failure to pay interest, principal and fees when due; breach of
a covenant or warranty; acceleration of or failure to pay other
debt in excess of $50 million (excluding Securitization
Indebtedness); insolvency matters; and a change of control.
The 6.00% senior unsecured notes, 9.875% senior
unsecured notes, 7.375% senior unsecured notes and
5.75% senior unsecured notes contain various covenants
including limitations on liens, limitations on potential sale
and leaseback transactions and change of control restrictions.
In addition, there are limitations on mergers, consolidations
and potential sale of all or substantially all of the
Companys assets. Events of default in the notes include
failure to pay interest and principal when due, breach of a
covenant or warranty, acceleration of other debt in excess of
$50 million and insolvency matters. The Convertible Notes
do not contain affirmative or negative covenants; however, the
limitations on mergers, consolidations and potential sale of all
or substantially all of the Companys assets and the events
of default for the Companys senior unsecured notes are
applicable to such notes. Holders of the Convertible Notes have
the right to require the Company to repurchase the Convertible
Notes at 100% of principal plus accrued and unpaid interest in
the event of a fundamental change, defined to include, among
other things, a change of control, certain recapitalizations and
if the Companys common stock is no longer listed on a
national securities exchange.
As of September 30, 2010, the Company was in compliance
with all of the covenants described above.
Each of the Companys non-recourse, securitized term notes
and the bank conduit facility contain various triggers relating
to the performance of the applicable loan pools. For example, if
the vacation ownership contract receivables pool that
collateralizes one of the Companys securitization notes
fails to perform within the parameters established by the
contractual triggers (such as higher default or delinquency
rates), there are provisions pursuant to which the cash flows
for that pool will be maintained in the securitization as extra
collateral for the note holders or applied to accelerate the
repayment of outstanding principal to the noteholders. As of
September 30, 2010, all of the Companys securitized
loan pools were in compliance with applicable contractual
triggers.
14
Maturities
and Capacity
The Companys outstanding debt as of September 30,
2010 matures as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitized
|
|
|
|
|
|
|
|
|
|
Vacation
|
|
|
|
|
|
|
|
|
|
Ownership
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
Other
|
|
|
Total
|
|
|
Within 1 year
|
|
$
|
187
|
|
|
$
|
32
|
|
|
$
|
219
|
|
Between 1 and 2 years
|
|
|
249
|
|
|
|
311
|
(*)
|
|
|
560
|
|
Between 2 and 3 years
|
|
|
318
|
|
|
|
11
|
|
|
|
329
|
|
Between 3 and 4 years
|
|
|
189
|
|
|
|
277
|
|
|
|
466
|
|
Between 4 and 5 years
|
|
|
162
|
|
|
|
12
|
|
|
|
174
|
|
Thereafter
|
|
|
510
|
|
|
|
1,358
|
|
|
|
1,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,615
|
|
|
$
|
2,001
|
|
|
$
|
3,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
Includes a liability of $168 million related to the
Bifurcated Conversion Feature associated with the Companys
Convertible Notes.
|
As maturities of the securitized vacation ownership debt are
based on the contractual payment terms of the underlying
vacation ownership contract receivables, actual maturities may
differ as a result of prepayments by the vacation ownership
contract receivable obligors.
As of September 30, 2010, available capacity under the
Companys borrowing arrangements was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capacity
|
|
|
Outstanding
Borrowings
|
|
|
Available Capacity
|
|
|
Securitized vacation ownership debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
Term notes
|
|
$
|
1,400
|
|
|
$
|
1,400
|
|
|
$
|
|
|
Bank conduit facility
(a)
|
|
|
600
|
|
|
|
215
|
|
|
|
385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitized vacation ownership debt
(b)
|
|
$
|
2,000
|
|
|
$
|
1,615
|
|
|
$
|
385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
6.00% senior unsecured notes (due December 2016)
|
|
$
|
798
|
|
|
$
|
798
|
|
|
$
|
|
|
Revolving credit facility (due October 2013)
(c)
|
|
|
950
|
|
|
|
26
|
|
|
|
924
|
|
9.875% senior unsecured notes (due May 2014)
|
|
|
240
|
|
|
|
240
|
|
|
|
|
|
3.50% convertible notes (due May 2012)
|
|
|
289
|
|
|
|
289
|
|
|
|
|
|
7.375% senior unsecured notes (due March 2020)
|
|
|
247
|
|
|
|
247
|
|
|
|
|
|
5.75% senior unsecured notes (due February 2018)
|
|
|
247
|
|
|
|
247
|
|
|
|
|
|
Vacation rentals capital leases
|
|
|
120
|
|
|
|
120
|
|
|
|
|
|
Other
|
|
|
56
|
|
|
|
34
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
2,947
|
|
|
$
|
2,001
|
|
|
|
946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Issuance of letters of credit
(c)
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The capacity of this facility is subject to the Companys
ability to provide additional assets to collateralize additional
securitized borrowings.
|
|
|
(b)
|
These outstanding borrowings are collateralized by
$2,874 million of underlying gross vacation ownership
contract receivables and related assets.
|
|
|
(c)
|
The capacity under the Companys revolving credit facility
includes availability for letters of credit. As of
September 30, 2010, the available capacity of
$924 million was further reduced by $28 million for
the issuance of letters of credit.
|
Vacation
Ownership Contract Receivables and 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
Companys 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. 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 Companys 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.
15
The assets and liabilities of these vacation ownership SPEs are
as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Securitized contract receivables, gross
(a)
|
|
$
|
2,709
|
|
|
$
|
2,591
|
|
Securitized restricted cash
(b)
|
|
|
140
|
|
|
|
133
|
|
Interest receivables on securitized contract receivables
(c)
|
|
|
22
|
|
|
|
20
|
|
Other assets
(d)
|
|
|
3
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
Total SPE assets
(e)
|
|
|
2,874
|
|
|
|
2,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitized term notes
(f)
|
|
|
1,400
|
|
|
|
1,112
|
|
Securitized conduit facilities
(f)
|
|
|
215
|
|
|
|
395
|
|
Other liabilities
(g)
|
|
|
25
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
Total SPE liabilities
|
|
|
1,640
|
|
|
|
1,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SPE assets in excess of SPE liabilities
|
|
$
|
1,234
|
|
|
$
|
1,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Included in current ($251 million and $244 million as
of September 30, 2010 and December 31, 2009,
respectively) and non-current ($2,458 million and
$2,347 million as of September 30, 2010 and
December 31, 2009, respectively) vacation ownership
contract receivables on the Companys Consolidated Balance
Sheets.
|
|
|
(b)
|
Included in other current assets ($75 million and
$69 million as of September 30, 2010 and
December 31, 2009, respectively) and other non-current
assets ($65 million and $64 million as of
September 30, 2010 and December 31, 2009,
respectively) on the Companys Consolidated Balance Sheets.
|
|
|
(c)
|
Included in trade receivables, net on the Companys
Consolidated Balance Sheets.
|
|
|
(d)
|
Primarily includes interest rate derivative contracts and
related assets; included in other non-current assets on the
Companys Consolidated Balance Sheets.
|
|
|
(e)
|
Excludes deferred financing costs of $17 million and
$20 million as of September 30, 2010 and
December 31, 2009, respectively, related to securitized
debt.
|
|
|
|
|
(f)
|
Included in current ($187 million and $209 million as
of September 30, 2010 and December 31, 2009,
respectively) and long-term ($1,428 million and
$1,298 million as of September 30, 2010 and
December 31, 2009, respectively) securitized vacation
ownership debt on the Companys Consolidated Balance Sheets.
|
|
|
|
|
(g)
|
Primarily includes interest rate derivative contracts and
accrued interest on securitized debt; included in accrued
expenses and other current liabilities ($4 million as of
both September 30, 2010 and December 31,
2009) and other non-current liabilities ($21 million
and $22 million as of September 30, 2010 and
December 31, 2009, respectively) on the Companys
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
$667 million and $860 million as of September 30,
2010 and December 31, 2009, respectively. A summary of such
receivables and total vacation ownership SPE assets in excess of
SPE liabilities and net of the allowance for loan losses, is as
follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
SPE assets in excess of SPE liabilities
|
|
$
|
1,234
|
|
|
$
|
1,222
|
|
Non-securitized contract receivables
|
|
|
667
|
|
|
|
598
|
|
Secured contract receivables
(*)
|
|
|
|
|
|
|
262
|
|
Allowance for loan losses
|
|
|
(364
|
)
|
|
|
(370
|
)
|
|
|
|
|
|
|
|
|
|
Total, net
|
|
$
|
1,537
|
|
|
$
|
1,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
As of December 31, 2009, such receivables collateralized
the Companys secured, revolving foreign credit facility,
which was paid down and terminated during March 2010.
|
Interest
Expense
Interest expense incurred in connection with the Companys
non-securitized debt was $38 million and $110 million
during the three and nine months ended September 30, 2010,
respectively, and $37 million and $87 million during
the three and nine months ended September 30, 2009,
respectively. The Company also incurred a loss of
$11 million during the third quarter of 2010 in connection
with the repurchase of a portion of the Convertible Notes and
the settlement of the Call Options, which is included within
interest expense during the three and nine months ended
September 30, 2010. Additionally, in connection with the
early extinguishment of the term loan facility during the first
quarter of 2010, the Company effectively terminated a related
interest rate swap agreement, which resulted in the
reclassification of a $14 million unrealized loss from
accumulated other comprehensive income to interest expense
during the nine months ended September 30, 2010. The
Company also recorded an additional $2 million of costs
during the first quarter of 2010 in connection with the early
extinguishment of its term loan and revolving foreign credit
facilities, which was also included within interest expense
during the nine months ended September 30, 2010. Cash paid
related to such interest
16
expense was $80 million and $51 million during the
nine months ended September 30, 2010 and 2009,
respectively. Such amounts exclude cash payments related to
early extinguishment of debt costs.
Interest expense is partially offset on the Consolidated
Statements of Income by capitalized interest of $2 million
and $4 million during the three and nine months ended
September 30, 2010, respectively, and $3 million and
$8 million during the three and nine months ended
September 30, 2009, respectively.
Cash paid related to consumer financing interest expense was
$68 million and $83 million during the nine months
ended September 30, 2010 and 2009, respectively.
The guidance for fair value measurements requires disclosures
about the Companys assets and liabilities that are
measured at fair value. The following table presents information
about the Companys financial assets and liabilities that
are measured at fair value on a recurring basis as of
September 30, 2010, 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 Companys
assessment of the significance of a particular input to the fair
value measurement in its entirety requires judgment, and
considers factors specific to the asset or liability.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measure on a
|
|
|
|
|
|
|
Recurring Basis
|
|
|
|
|
|
|
|
|
|
Significant
|
|
|
|
As of
|
|
|
Significant
|
|
|
Unobservable
|
|
|
|
September 30,
|
|
|
Other Observable
|
|
|
Inputs
|
|
|
|
2010
|
|
|
Inputs (Level 2)
|
|
|
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Notes related Call Options
|
|
$
|
168
|
|
|
$
|
|
|
|
$
|
168
|
|
Interest rate contracts
|
|
|
8
|
|
|
|
8
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
7
|
|
|
|
7
|
|
|
|
|
|
Securities
available-for-sale
(b)
|
|
|
6
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
189
|
|
|
$
|
15
|
|
|
$
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
Bifurcated Conversion Feature
|
|
$
|
168
|
|
|
$
|
|
|
|
$
|
168
|
|
Interest rate contracts
|
|
|
34
|
|
|
|
34
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
8
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
210
|
|
|
$
|
42
|
|
|
$
|
168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Included in other current assets and other non-current assets on
the Companys Consolidated Balance Sheet.
|
|
|
(b)
|
Included in other non-current assets on the Companys
Consolidated Balance Sheet.
|
|
|
(c)
|
Included in long-term debt, accrued expenses and other current
liabilities and other non-current liabilities on the
Companys Consolidated Balance Sheet.
|
The Companys derivative instruments primarily consist of
the Call Options and Bifurcated Conversion Feature related to
the Convertible Notes, pay-fixed/receive-variable interest rate
swaps, interest rate caps, foreign exchange forward contracts
and foreign exchange average rate forward contracts (see
Note 9Derivative Instruments and Hedging
17
Activities for more detail). For assets and liabilities that are
measured using quoted prices in active markets, the fair value
is the published market price per unit multiplied by the number
of units held without consideration of transaction costs. Assets
and liabilities that are measured using other significant
observable inputs are valued by reference to similar assets and
liabilities. For these items, a significant portion of fair
value is derived by reference to quoted prices of similar assets
and liabilities in active markets. For assets and liabilities
that are measured using significant unobservable inputs, fair
value is primarily derived from analyses obtained from
third-party sources, such as market price provided by an
independent third-party pricing service.
The following table presents additional information about
financial assets which are measured at fair value on a recurring
basis for which the Company has utilized Level 3 inputs to
determine fair value as of September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
Significant Unobservable Inputs (Level 3)
|
|
|
|
|
|
|
Derivative
|
|
|
|
|
|
|
|
|
|
Liability-
|
|
|
|
|
|
|
Derivative
|
|
|
Bifurcated
|
|
|
Securities
|
|
|
|
Asset-Call
|
|
|
Conversion
|
|
|
Available-For-
|
|
|
|
Options
|
|
|
Feature
|
|
|
Sale
|
|
|
Balance as of January 1, 2010
|
|
$
|
176
|
|
|
$
|
(176
|
)
|
|
$
|
5
|
|
Change in fair value
|
|
|
77
|
|
|
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2010
|
|
|
253
|
|
|
|
(253
|
)
|
|
|
5
|
|
Change in fair value
|
|
|
(90
|
)
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2010
|
|
|
163
|
|
|
|
(163
|
)
|
|
|
5
|
|
Convertible Notes activity
(*)
|
|
|
(107
|
)
|
|
|
107
|
|
|
|
|
|
Change in fair value
|
|
|
112
|
|
|
|
(112
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2010
|
|
$
|
168
|
|
|
$
|
(168
|
)
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
Represents the change in value related to the Companys
repurchase of a portion of its Bifurcated Conversion Feature and
the settlement of a corresponding portion of the Call Options
(see Note 7Long-Term Debt and Borrowing Arrangements).
|
The fair value of financial instruments is generally determined
by reference to market values resulting from trading on a
national securities exchange or in an
over-the-counter
market. In cases where quoted market prices are not available,
fair value is based on estimates using present value or other
valuation techniques, as appropriate. The carrying amounts of
cash and cash equivalents, restricted cash, trade receivables,
accounts payable and accrued expenses and other current
liabilities approximate fair value due to the short-term
maturities of these assets and liabilities. The carrying amounts
and estimated fair values of all other financial instruments are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vacation ownership contract receivables, net
|
|
$
|
3,012
|
|
|
$
|
2,788
|
|
|
$
|
3,081
|
|
|
$
|
2,809
|
|
Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
(a)
|
|
|
3,616
|
|
|
|
3,759
|
|
|
|
3,522
|
|
|
|
3,405
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
7
|
|
|
|
7
|
|
|
|
3
|
|
|
|
3
|
|
Liabilities
|
|
|
(8
|
)
|
|
|
(8
|
)
|
|
|
(2
|
)
|
|
|
(2
|
)
|
Interest rate contracts
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
8
|
|
|
|
8
|
|
|
|
5
|
|
|
|
5
|
|
Liabilities
|
|
|
(34
|
)
|
|
|
(34
|
)
|
|
|
(45
|
)
|
|
|
(45
|
)
|
Convertible Notes related Call Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
168
|
|
|
|
168
|
|
|
|
176
|
|
|
|
176
|
|
|
|
|
|
(a)
|
As of September 30, 2010 and December 31, 2009,
includes $168 million and $176 million, respectively,
related to the Bifurcated Conversion Feature liability.
|
|
|
(b)
|
Instruments are in net loss positions as of September 30,
2010 and in net gain positions as of December 31, 2009.
|
|
|
(c)
|
Instruments are in net loss positions as of September 30,
2010 and December 31, 2009.
|
18
The weighted average interest rate on outstanding vacation
ownership contract receivables was 13.1% and 13.0% as of
September 30, 2010 and December 31, 2009,
respectively. The estimated fair value of the vacation ownership
contract receivables as of September 30, 2010 and
December 31, 2009 was approximately 93% and 91%,
respectively, of the carrying value.
|
|
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
Company primarily hedges its foreign currency exposure to the
British pound and Euro. The impact of the cash flow hedges did
not have a material impact on the Companys results of
operations, financial position and cash flows during the three
and nine months ended September 30, 2010. The fluctuations
in the value of the freestanding forward contracts do, however,
largely offset the impact of changes in the value of the
underlying risk that they are intended to hedge. The impact of
the freestanding forward contracts was a loss of $8 million
and a loss of $11 million, which were included in operating
expense on the Companys Consolidated Statements of Income
during the three and nine months ended September 30, 2010,
respectively. The impact of the freestanding forward contracts
was a loss of $9 million and a gain of $1 million,
which were included in operating expense on the Companys
Consolidated Statements of Income during three and nine months
ended September 30, 2009. The impact of the freestanding
forward contracts was not material to the Companys
financial position or cash flows during the three and nine
months ended September 30, 2010 and 2009. The pre-tax
amount of gains or losses reclassified from other comprehensive
income to earnings resulting from ineffectiveness or from
excluding a component of the forward contracts gain or
loss from the effectiveness calculation for cash flow hedges
during the three and nine months ended September 30, 2010
and 2009 was not material. The amount of gains or losses the
Company expects to reclassify from other comprehensive income to
earnings over the next 12 months is not material.
Interest
Rate Risk
A portion of the debt used to finance the Companys
operations is also 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
Companys floating rate debt include freestanding
derivatives and derivatives designated as cash flow hedges. In
connection with its qualifying cash flow hedges, the Company
recorded a net pre-tax gain of $2 million during nine
months ended September 30, 2010, and a net pre-tax gain of
$1 million and $21 million during the three and nine
months ended September 30, 2009, respectively, to other
comprehensive income. The pre-tax amount of gains or losses
reclassified from other comprehensive income to consumer
financing interest or interest expense resulting from
ineffectiveness or from excluding a component of the
derivatives gain or loss from the effectiveness
calculation for cash flow hedges was insignificant during the
three and nine months ended September 30, 2010 and 2009. In
connection with the early extinguishment of the term loan
facility during the first quarter of 2010 (See
Note 7Long-Term Debt and Borrowing Arrangements), the
Company effectively terminated the interest rate swap agreement,
which resulted in the reclassification of a $14 million
unrealized loss from accumulated other comprehensive income to
interest expense on the Companys Consolidated Statement of
Income during the nine months ended September 30, 2010. The
amount of losses that the Company expects to reclassify from
other comprehensive income to earnings during the next
12 months is not material. The impact of the freestanding
derivatives was a gain of $4 million and $11 million
(of which $2 million and $6 million were included in
consumer financing interest expense and $2 million and
$5 million were included in interest expense) on the
Companys Consolidated Statements of Income during the
three and nine months ended September 30, 2010,
respectively, and a gain of $1 million and $4 million
included in consumer financing interest expense on the
Companys Consolidated Statements of Income during the
three and nine months ended September 30, 2009,
respectively. The freestanding derivatives had an immaterial
impact on the Companys financial position and cash flows
during the three and nine months ended September 30, 2010
and 2009.
19
The following table summarizes information regarding the
Companys derivative instruments as of September 30,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
|
|
|
|
|
Other non-current liabilities
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
Other non-current assets
|
|
$
|
8
|
|
|
Other non-current liabilities
|
|
$
|
12
|
|
Foreign exchange contracts
|
|
Other current assets
|
|
|
7
|
|
|
Accrued exp. & other current liabs.
|
|
|
8
|
|
Convertible Notes related
|
|
|
|
|
|
|
|
|
|
|
|
|
Call Options
(*)
|
|
Other non-current assets
|
|
|
168
|
|
|
|
|
|
|
|
Bifurcated Conversion Feature
(*)
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated as hedging instruments
|
|
|
|
$
|
183
|
|
|
|
|
$
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
See Note 7Long-Term Debt and Borrowing Arrangements
for further detail.
|
The following table summarizes information regarding the
Companys derivative instruments as of December 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
|
Balance Sheet Location
|
|
Fair Value
|
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
|
|
|
|
|
Other non-current liabilities
|
|
$
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
Other non-current assets
|
|
$
|
5
|
|
|
Other non-current liabilities
|
|
$
|
6
|
|
Foreign exchange contracts
|
|
Other current assets
|
|
|
3
|
|
|
Accrued exp. & other current liabs.
|
|
|
2
|
|
Convertible Notes related
|
|
|
|
|
|
|
|
|
|
|
|
|
Call Options
(*)
|
|
Other non-current assets
|
|
|
176
|
|
|
|
|
|
|
|
Bifurcated Conversion Feature
(*)
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated as hedging instruments
|
|
|
|
$
|
184
|
|
|
|
|
$
|
184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
See Note 7Long-Term Debt and Borrowing Arrangements
for further detail.
|
The Company or one of its subsidiaries files income tax returns
in the U.S. federal jurisdiction and various states and
foreign jurisdictions. With few exceptions, the Company is no
longer subject to U.S. federal, state and local, or
non-U.S. income
tax examinations by tax authorities for years before 2003.
During the first quarter of 2007, the Internal Revenue Service
(IRS) opened an examination for Cendant
Corporations (Cendant or former
Parent) taxable years 2003 through 2006 during which the
Company was included in Cendants tax returns.
On July 15, 2010, the Company reached an agreement, along
with Cendant, with the IRS that resolves and pays Cendants
outstanding contingent tax liabilities relating to the
examination of the federal income tax returns for Cendants
taxable years 2003 through 2006. During September 2010, the
Company received $10 million in payment from Cendants
former real estate services business (Realogy), who
were responsible for 62.5% of the liability as per the
Separation Agreement, and paid $155 million for all such
tax liabilities including the final interest payable to Cendant,
who is the taxpayer. As a result, the Companys accrual for
outstanding Cendant contingent tax liabilities was
$78 million as of September 30, 2010. Such amount was
primarily related to legacy state and foreign tax issues. See
Note 16Separation Adjustments and Transactions with
Former Parent and Subsidiaries for more detailed information.
The Companys effective tax rate declined from 41% during
both the third quarter of 2009 and the nine months ended
September 30, 2009 to 34% during both the third quarter of
2010 and the nine months ended September 30, 2010 primarily
due to the benefit derived from the current utilization of
certain cumulative foreign tax credits, which the Company was
able to realize based on certain changes in the Companys
tax profile, as well as the settlement of the IRS Examination.
20
The Company made cash income tax payments, net of refunds, of
$70 million and $81 million during the nine months
ended September 30, 2010 and 2009, respectively. Such
payments exclude income tax related payments made to former
Parent.
|
|
11.
|
Commitments
and Contingencies
|
The Company is involved in claims, legal proceedings and
governmental inquiries related to the Companys business.
Wyndham
Worldwide Litigation
The Company is involved in claims and legal actions arising in
the ordinary course of its business including but not limited
to: for its lodging businessbreach of contract, fraud and
bad faith claims between franchisors and franchisees in
connection with franchise agreements and with owners in
connection with management contracts, negligence, breach of
contract, fraud, privacy, consumer protection and other
statutory claims asserted in connection with alleged acts or
occurrences at franchised or managed properties; for its
vacation exchange and rentals businessbreach of contract,
fraud and bad faith claims by affiliates and customers in
connection with their respective agreements, negligence, breach
of contract, fraud, privacy, consumer protection and other
statutory claims asserted by members and guests for alleged
injuries sustained at affiliated resorts and vacation rental
properties; for its vacation ownership businessbreach of
contract, bad faith, conflict of interest, fraud, privacy,
consumer protection and other statutory claims by property
owners associations, owners and prospective owners in
connection with the sale or use of VOIs or land, or the
management of vacation ownership resorts, construction defect
claims relating to vacation ownership units or resorts and
negligence, breach of contract, fraud, privacy, consumer
protection and other statutory claims by guests for alleged
injuries sustained at vacation ownership units or resorts; and
for each of its businesses, bankruptcy proceedings involving
efforts to collect receivables from a debtor in bankruptcy,
employment matters involving claims of discrimination,
harassment and wage and hour claims, claims of infringement upon
third parties intellectual property rights, tax claims and
environmental claims.
The Company believes that it has adequately accrued for such
matters with reserves of $37 million as of
September 30, 2010. Such amount is exclusive of matters
relating to the Companys separation from its Parent
(Separation). For matters not requiring accrual, the
Company believes that such matters will not have a material
adverse effect on its results of operations, financial position
or cash flows based on information currently available. However,
litigation is inherently unpredictable and, although the Company
believes that its accruals are adequate
and/or that
it has valid defenses in these matters, unfavorable results
could occur. As such, an adverse outcome from such proceedings
for which claims are awarded in excess of the amounts accrued,
if any, could be material to the Company with respect to
earnings or cash flows in any given reporting period. However,
the Company does not believe that the impact of such litigation
should result in a material liability to the Company in relation
to its consolidated financial position or liquidity.
Cendant
Litigation
Under the Separation Agreement, the Company agreed to be
responsible for 37.5% of certain of Cendants 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 16Separation Adjustments
and Transactions with Former Parent and Subsidiaries regarding
contingent litigation liabilities resulting from the Separation.
|
|
12.
|
Accumulated
Other Comprehensive Income
|
The components of accumulated other comprehensive income as of
September 30, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Minimum
|
|
|
Accumulated
|
|
|
|
Currency
|
|
|
Gains/(Losses)
|
|
|
Pension
|
|
|
Other
|
|
|
|
Translation
|
|
|
on Cash Flow
|
|
|
Liability
|
|
|
Comprehensive
|
|
|
|
Adjustments
|
|
|
Hedges, Net
|
|
|
Adjustment
|
|
|
Income
|
|
|
Balance, January 1, 2010, net of tax benefit of $32
|
|
$
|
166
|
|
|
$
|
(27
|
)
|
|
$
|
(1
|
)
|
|
$
|
138
|
|
Current period change
|
|
|
1
|
|
|
|
10
|
(*)
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2010, net of tax benefit of $39
|
|
$
|
167
|
|
|
$
|
(17
|
)
|
|
$
|
(1
|
)
|
|
$
|
149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
Primarily represents the reclassification of an after-tax
unrealized loss associated with the termination of an interest
rate swap agreement in connection with the early extinguishment
of the term loan facility (see Note 7Long-Term Debt
and Borrowing Arrangements).
|
21
The components of accumulated other comprehensive income as of
September 30, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Minimum
|
|
|
Accumulated
|
|
|
|
Currency
|
|
|
Gains/(Losses)
|
|
|
Pension
|
|
|
Other
|
|
|
|
Translation
|
|
|
on Cash Flow
|
|
|
Liability
|
|
|
Comprehensive
|
|
|
|
Adjustments
|
|
|
Hedges, Net
|
|
|
Adjustment
|
|
|
Income
|
|
|
Balance, January 1, 2009, net of tax benefit of $72
|
|
$
|
141
|
|
|
$
|
(45
|
)
|
|
$
|
2
|
|
|
$
|
98
|
|
Current period change
|
|
|
39
|
|
|
|
13
|
|
|
|
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2009, net of tax benefit of $35
|
|
$
|
180
|
|
|
$
|
(32
|
)
|
|
$
|
2
|
|
|
$
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustments exclude income taxes related to
investments in foreign subsidiaries where the Company intends to
reinvest the undistributed earnings indefinitely in those
foreign operations.
|
|
13.
|
Stock-Based
Compensation
|
The Company has a stock-based compensation plan available to
grant non-qualified stock options, incentive stock options,
SSARs, restricted stock, RSUs 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, which was amended and restated as a result
of shareholders approval at the May 12, 2009 annual
meeting of shareholders, a maximum of 36.7 million shares
of common stock may be awarded. As of September 30, 2010,
14.9 million shares remained available.
Incentive
Equity Awards Granted by the Company
The activity related to incentive equity awards granted by the
Company for the nine months ended September 30, 2010
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs
|
|
|
SSARs
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
|
|
of RSUs
|
|
|
Grant Price
|
|
|
of SSARs
|
|
|
Exercise Price
|
|
|
Balance as of January 1, 2010
|
|
|
8.3
|
|
|
$
|
9.60
|
|
|
|
2.1
|
|
|
$
|
21.70
|
|
Granted
|
|
|
1.9
|
(b)
|
|
|
22.84
|
|
|
|
0.2
|
(b)
|
|
|
22.84
|
|
Vested/exercised
|
|
|
(2.8
|
)
|
|
|
11.67
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(0.4
|
)
|
|
|
11.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2010
(a)
|
|
|
7.0
|
(c)
|
|
|
12.24
|
|
|
|
2.3
|
(d)
|
|
|
21.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Aggregate unrecognized compensation expense related to SSARs and
RSUs was $71 million as of September 30, 2010 which is
expected to be recognized over a weighted average period of
2.5 years.
|
|
|
(b)
|
Primarily represents awards granted by the Company on
February 24, 2010.
|
|
|
(c)
|
Approximately 6.7 million RSUs outstanding as of
September 30, 2010 are expected to vest over time.
|
|
|
(d)
|
Approximately 1.3 million of the 2.3 million SSARs are
exercisable as of September 30, 2010. The Company assumes
that all unvested SSARs are expected to vest over time. SSARs
outstanding as of September 30, 2010 had an intrinsic value
of $18 million and have a weighted average remaining
contractual life of 3.6 years.
|
On February 24, 2010, the Company approved grants of
incentive equity awards totaling $43 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.
The fair value of SSARs granted by the Company on
February 24, 2010 was estimated on the date of 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 (i) the Companys stock and
(ii) the stock of comparable companies over the estimated
expected life of the SSARs. The expected life represents the
period of time the SSARs are expected to be outstanding and is
based on the simplified method, as defined in Staff
Accounting Bulletin 110. The risk free interest rate is
based on yields on U.S. Treasury strips with a maturity
similar to the
22
estimated expected life of the SSARs. The projected dividend
yield was based on the Companys anticipated annual
dividend divided by the twelve-month target price of the
Companys stock on the date of the grant.
|
|
|
|
|
|
|
SSARs Issued on
|
|
|
|
February 24,
2010
|
|
|
Grant date fair value
|
|
$
|
8.66
|
|
Grant date strike price
|
|
$
|
22.84
|
|
Expected volatility
|
|
|
53.0%
|
|
Expected life
|
|
|
4.25 yrs.
|
|
Risk free interest rate
|
|
|
2.07%
|
|
Projected dividend yield
|
|
|
2.10%
|
|
Stock-Based
Compensation Expense
The Company recorded stock-based compensation expense of
$9 million and $30 million during the three and nine
months ended September 30, 2010, respectively, and
$9 million and $28 million during the three and nine
months ended September 30, 2009, respectively, related to
the incentive equity awards granted by the Company. The Company
recognized $4 million and $12 million of a net tax
benefit during the three and nine months ended
September 30, 2010, respectively, for stock-based
compensation arrangements on the Consolidated Statements of
Income. The Company recognized $4 million and
$7 million of a net tax benefit during the three and nine
months ended September 30, 2009, respectively, for
stock-based compensation arrangements on the Consolidated
Statements of Income. During the nine months ended
September 30, 2010, the Company increased its pool of
excess tax benefits available to absorb tax deficiencies
(APIC Pool) by $11 million due to the vesting
of RSUs and exercise of stock options. During March 2009, the
Company utilized its APIC Pool related to the vesting of RSUs,
which reduced the balance to $0. During May 2009, the Company
recorded a $4 million charge to its provision for income
taxes related to additional vesting of RSUs. As of
December 31, 2009, the Companys APIC Pool balance was
$0.
Incentive
Equity Awards
Prior to August 1, 2006, all employee stock awards (stock
options and RSUs) were granted by Cendant. At the time of
Separation, a portion of Cendants outstanding equity
awards were converted into equity awards of the Company at a
ratio of one share of the Companys common stock for every
five shares of Cendants common stock. As a result, the
Company issued approximately 2 million RSUs and
approximately 24 million stock options upon completion of
the conversion of existing Cendant equity awards into Wyndham
equity awards. On August 1, 2006, all 2 million
converted RSUs vested and, as such, there are no converted RSUs
outstanding as of such date. As of September 30, 2010,
there were 2.9 million converted stock options.
As of September 30, 2010, the 2.9 million converted
stock options outstanding had a weighted average exercise price
of $35.85 a weighted average remaining contractual life of
1.3 years and all 2.9 million options were
exercisable. There were 0.3 million outstanding
in-the-money
stock options, which had an aggregate intrinsic value of
$1.8 million.
The Company withheld $23 million of taxes for the net share
settlement of incentive equity awards during the nine months
ended September 30, 2010. Such amount is included in other,
net within financing activities on the Consolidated Statement of
Cash Flows.
The reportable segments presented below represent the
Companys operating segments for which separate financial
information is available and which is utilized on a regular
basis by its chief operating decision maker to assess
performance and to allocate resources. In identifying its
reportable segments, the Company also considers the nature of
services provided by its operating segments. Management
evaluates the operating results of each of its reportable
segments based upon net revenues and EBITDA, which
is defined as net income before depreciation and amortization,
interest expense (excluding consumer financing interest),
interest income (excluding consumer financing
23
interest) and income taxes, each of which is presented on the
Companys Consolidated Statements of Income. The
Companys presentation of EBITDA may not be comparable to
similarly-titled measures used by other companies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Net
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
Revenues
|
|
|
EBITDA
|
|
|
Revenues
|
|
|
EBITDA
|
|
|
Lodging
|
|
$
|
203
|
|
|
$
|
67
|
|
|
$
|
183
|
|
|
$
|
58
|
|
Vacation Exchange and Rentals
|
|
|
330
|
|
|
|
103
|
(c)
|
|
|
327
|
|
|
|
107
|
|
Vacation Ownership
|
|
|
533
|
|
|
|
123
|
(d)
|
|
|
508
|
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Reportable Segments
|
|
|
1,066
|
|
|
|
293
|
|
|
|
1,018
|
|
|
|
269
|
|
Corporate and Other
(a)(b)
|
|
|
(1
|
)
|
|
|
30
|
|
|
|
(2
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company
|
|
$
|
1,065
|
|
|
|
323
|
|
|
$
|
1,016
|
|
|
|
254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
46
|
|
Interest expense
|
|
|
|
|
|
|
47
|
(e)
|
|
|
|
|
|
|
34
|
|
Interest income
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
$
|
235
|
|
|
|
|
|
|
$
|
175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Includes the elimination of transactions between segments.
|
|
|
(b)
|
Includes $52 million of a net benefit and $2 million
of a net expense related to the resolution of and adjustment to
certain contingent liabilities and assets during the three
months ended September 30, 2010 and 2009, respectively, and
$23 million and $13 million of corporate costs during
the three months ended September 30, 2010 and 2009,
respectively.
|
|
|
(c)
|
Includes $1 million related to costs incurred in connection
with the Companys acquisition of ResortQuest during
September 2010.
|
|
|
(d)
|
Includes a non-cash impairment charge of $4 million to
reduce the value of certain vacation ownership properties and
related assets held for sale that are no longer consistent with
the Companys development plans.
|
|
|
(e)
|
Includes $11 million of costs incurred for the repurchase
of a portion of the Companys Convertible Notes during the
third quarter of 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Net
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
Revenues
|
|
|
EBITDA
|
|
|
Revenues
|
|
|
EBITDA
(g)
|
|
|
Lodging
|
|
$
|
525
|
|
|
$
|
148
|
(c)
|
|
$
|
511
|
|
|
$
|
143
|
|
Vacation Exchange and Rentals
|
|
|
912
|
|
|
|
261
|
(d)
|
|
|
894
|
|
|
|
240
|
|
Vacation Ownership
|
|
|
1,483
|
|
|
|
310
|
(e)
|
|
|
1,437
|
|
|
|
255
|
(h)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Reportable Segments
|
|
|
2,920
|
|
|
|
719
|
|
|
|
2,842
|
|
|
|
638
|
|
Corporate and Other
(a)(b)
|
|
|
(6
|
)
|
|
|
(4
|
)
|
|
|
(5
|
)
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company
|
|
$
|
2,914
|
|
|
|
715
|
|
|
$
|
2,837
|
|
|
|
583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
128
|
|
|
|
|
|
|
|
134
|
|
Interest expense
|
|
|
|
|
|
|
133
|
(f)
|
|
|
|
|
|
|
79
|
|
Interest income
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
$
|
457
|
|
|
|
|
|
|
$
|
375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Includes the elimination of transactions between segments.
|
|
|
(b)
|
Includes $51 million of a net benefit and $6 million
of a net expense related to the resolution of and adjustment to
certain contingent liabilities and assets during the nine months
ended September 30, 2010 and 2009, respectively, and
$55 million and $49 million of corporate costs during
the nine months ended September 30, 2010 and 2009,
respectively.
|
|
|
(c)
|
Includes $1 million related to costs incurred in connection
with the Companys acquisition of Tryp during June 2010.
|
|
|
(d)
|
Includes $4 million related to costs incurred in connection
with the Companys acquisition of Hoseasons during March
2010 and $1 million related to costs incurred in connection
with the Companys acquisition of ResortQuest during
September 2010.
|
|
|
(e)
|
Includes a non-cash impairment charge of $4 million to
reduce the value of certain vacation ownership properties and
related assets held for sale that are no longer consistent with
the Companys development plans.
|
24
|
|
|
|
(f)
|
Includes $16 million of costs incurred for the early
extinguishment of the Companys revolving foreign credit
facility and term loan facility during March 2010 and
$11 million of costs incurred for the repurchase of a
portion of the Companys Convertible Notes during the third
quarter of 2010.
|
|
|
|
|
(g)
|
Includes restructuring costs of $3 million,
$6 million, $36 million and $1 million for
Lodging, Vacation Exchange and Rentals, Vacation Ownership and
Corporate and Other, respectively, during the nine months ended
September 30, 2009.
|
|
|
(h)
|
Includes a non-cash impairment charge of $8 million to
reduce the value of certain vacation ownership properties and
related assets held for sale that are no longer consistent with
the Companys development plans.
|
During 2008, the Company committed to various strategic
realignment initiatives targeted principally at reducing costs,
enhancing organizational efficiency and consolidating and
rationalizing existing processes and facilities. During the nine
months ended September 30, 2009, the Company recorded
$46 million of incremental restructuring costs. During the
nine months ended September 30, 2010, the Company reduced
its liability with $9 million of cash payments. The
remaining liability of $13 million is expected to be paid
in cash; $12 million of facility-related by September 2017
and $1 million of personnel-related by December 2010.
Total restructuring costs by segment for the nine months ended
September 30, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel
|
|
|
Facility
|
|
|
Asset Write-offs/
|
|
|
Contract
|
|
|
|
|
|
|
Related
(a)
|
|
|
Related
(b)
|
|
|
Impairments
(c)
|
|
|
Terminations
(d)
|
|
|
Total
|
|
|
Lodging
|
|
$
|
3
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3
|
|
Vacation Exchange and Rentals
|
|
|
5
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
Vacation Ownership
|
|
|
1
|
|
|
|
20
|
|
|
|
14
|
|
|
|
1
|
|
|
|
36
|
|
Corporate
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10
|
|
|
$
|
21
|
|
|
$
|
14
|
|
|
$
|
1
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Represents severance benefits resulting from reductions of
approximately 370 in staff. The Company formally communicated
the termination of employment to all 370 employees,
representing a wide range of employee groups. As of
September 30, 2009, the Company had terminated all of these
employees.
|
|
|
(b)
|
Primarily related to the termination of leases of certain sales
offices.
|
|
|
(c)
|
Primarily related to the write-off of assets from sales office
closures and cancelled development projects.
|
|
|
(d)
|
Primarily represents costs incurred in connection with the
termination of a property development contract.
|
The activity related to the restructuring costs is summarized by
category as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability as of
|
|
|
|
|
|
Liability as of
|
|
|
|
January 1,
|
|
|
Cash
|
|
|
September 30,
|
|
|
|
2010
|
|
|
Payments
|
|
|
2010
|
|
|
Personnel-Related
(*)
|
|
$
|
3
|
|
|
$
|
2
|
|
|
$
|
1
|
|
Facility-Related
|
|
|
18
|
|
|
|
6
|
|
|
|
12
|
|
Contract Terminations
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22
|
|
|
$
|
9
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
As of September 30, 2009, the Company had terminated all of
the employees related to such costs.
|
|
|
16.
|
Separation
Adjustments and Transactions with Former Parent and
Subsidiaries
|
Transfer
of Cendant Corporate Liabilities and Issuance of Guarantees to
Cendant and Affiliates
Pursuant to the Separation Agreement, upon the distribution of
the Companys common stock to Cendant shareholders, the
Company entered into certain guarantee commitments with Cendant
(pursuant to the assumption of certain liabilities and the
obligation to indemnify Cendant and Realogy and travel
distribution services (Travelport) for such
liabilities) and guarantee commitments related to deferred
compensation arrangements with each of Cendant and Realogy.
These guarantee arrangements primarily relate to certain
contingent litigation liabilities, contingent tax liabilities,
and Cendant contingent and other corporate liabilities, of which
the Company assumed and is responsible for 37.5% while Realogy
is responsible for the remaining 62.5%. The remaining balance of
liabilities assumed by the Company in connection with the
Separation was $104 million and $310 million as of
September 30, 2010 and December 31, 2009,
respectively. These amounts were comprised of certain Cendant
corporate liabilities which were recorded on the books of
Cendant as well as additional liabilities which were established
for guarantees issued at the
25
date of Separation, July 31, 2006 (Separation
Date), related to certain unresolved contingent matters
and certain others that could arise during the guarantee period.
Regarding the guarantees, if any of the companies responsible
for all or a portion of such liabilities were to default in its
payment of costs or expenses related to any such liability, the
Company would be responsible for a portion of the defaulting
party or parties obligation. The Company also provided a
default guarantee related to certain deferred compensation
arrangements related to certain current and former senior
officers and directors of Cendant, Realogy and Travelport. These
arrangements, which are discussed in more detail below, were
valued upon the Separation in accordance with the guidance for
guarantees and recorded as liabilities on the Consolidated
Balance Sheets. To the extent such recorded liabilities are not
adequate to cover the ultimate payment amounts, such excess will
be reflected as an expense to the results of operations in
future periods.
As a result of the sale of Realogy on April 10, 2007,
Realogys senior debt credit rating was downgraded to below
investment grade. Under the Separation Agreement, if Realogy
experienced such a change of control and suffered such a ratings
downgrade, it was required to post a letter of credit in an
amount acceptable to the Company and Avis Budget Group to
satisfy the fair value of Realogys indemnification
obligations for the Cendant legacy contingent liabilities in the
event Realogy could not otherwise satisfy such obligations to
the extent they became due. On April 26, 2007, Realogy
posted a $500 million irrevocable standby letter of credit
from a major commercial bank in favor of Avis Budget Group and
upon which demand may be made if Realogy does not otherwise
satisfy its obligations for its share of the Cendant legacy
contingent liabilities. The letter of credit can be adjusted
from time to time based upon the outstanding contingent
liabilities and has an expiration date of September 2013,
subject to renewal and certain provisions. As such, the letter
of credit has been reduced three times, most recently to
$133 million during September 2010. The issuance of this
letter of credit does not relieve or limit Realogys
obligations for these liabilities.
As of September 30, 2010, the $104 million of
Separation related liabilities is comprised of $5 million
for litigation matters, $78 million for tax liabilities,
$16 million for liabilities of previously sold businesses
of Cendant, $4 million for other contingent and corporate
liabilities and $1 million of liabilities where the
calculated guarantee amount exceeded the contingent liability
assumed at the Separation Date. In connection with these
liabilities, $64 million is recorded in current due to
former Parent and subsidiaries and $39 million is recorded
in long-term due to former Parent and subsidiaries as of
September 30, 2010 on the Consolidated Balance Sheet. The
Company will indemnify Cendant for these contingent liabilities
and therefore any payments made to the third party would be
through the former Parent. The $1 million relating to
guarantees is recorded in other current liabilities as of
September 30, 2010 on the Consolidated Balance Sheet. The
actual timing of payments relating to these liabilities is
dependent on a variety of factors beyond the Companys
control. In addition, as of September 30, 2010, the Company
had $10 million of receivables due from former Parent and
subsidiaries primarily relating to income taxes, which is
recorded in other current assets on the Consolidated Balance
Sheet. Such receivables totaled $5 million as of
December 31, 2009.
Following is a discussion of the liabilities on which the
Company issued guarantees.
|
|
|
|
·
|
Contingent litigation liabilities The Company assumed
37.5% of liabilities for certain litigation relating to, arising
out of or resulting from certain lawsuits in which Cendant is
named as the defendant. The indemnification obligation will
continue until the underlying lawsuits are resolved. The Company
will indemnify Cendant to the extent that Cendant is required to
make payments related to any of the underlying lawsuits. As the
indemnification obligation relates to matters in various stages
of litigation, the maximum exposure cannot be quantified. Due to
the inherently uncertain nature of the litigation process, the
timing of payments related to these liabilities cannot
reasonably be predicted, but is expected to occur over several
years. Since the Separation, Cendant settled a majority of these
lawsuits and the Company assumed a portion of the related
indemnification obligations. For each settlement, the Company
paid 37.5% of the aggregate settlement amount to Cendant. The
Companys payment obligations under the settlements were
greater or less than the Companys accruals, depending on
the matter. As a result of settlements and payments to Cendant,
as well as other reductions and accruals for developments in
active litigation matters, the Companys aggregate accrual
for outstanding Cendant contingent litigation liabilities was
$5 million as of September 30, 2010.
|
|
|
·
|
Contingent tax liabilities Prior to the Separation, the
Company and Realogy were included in the consolidated federal
and state income tax returns of Cendant through the Separation
date for the 2006 period then ended. The Company is generally
liable for 37.5% of certain contingent tax liabilities. In
addition, each of the Company, Cendant and Realogy may be
responsible for 100% of certain of Cendants tax
liabilities that will provide the responsible party with a
future, offsetting tax benefit.
|
On July 15, 2010, Cendant and the IRS agreed to settle the
IRS examination of Cendants taxable years 2003 through
2006. The agreements with the IRS close the IRS examination for
tax periods prior to the Separation Date. The agreements with
the IRS also include a resolution with respect to the tax
treatment of the
26
Companys timeshare receivables, which resulted in the
acceleration of unrecognized deferred tax liabilities as of the
Separation Date. In connection with reaching agreement with the
IRS to resolve the contingent federal tax liabilities at issue,
the Company entered into an agreement with Realogy to clarify
each partys obligations under the tax sharing agreement.
Under the agreement with Realogy, among other things, the
parties specified that the Company has sole responsibility for
taxes and interest associated with the acceleration of timeshare
receivables income previously deferred for tax purposes, while
Realogy will not seek any reimbursement for the loss of a step
up in basis of certain assets.
During September 2010, the Company received $10 million in
payment from Realogy and paid $155 million for all such tax
liabilities, including the final interest payable, to Cendant,
who is the taxpayer. The agreement with the IRS and the net
payment of $145 million resulted in (i) the reversal
of $190 million in net deferred tax liabilities allocated
from Cendant on the Separation Date with a corresponding
increase to stockholders equity during the third quarter
of 2010; and (ii) the recognition of a $55 million
gain ($42 million, net of tax) with a corresponding
decrease to general and administrative expenses during the third
quarter of 2010. As of September 30, 2010, the
Companys accrual for outstanding Cendant contingent tax
liabilities was $78 million, which relates to legacy state
and foreign tax issues that are expected to be resolved in the
next few years.
|
|
|
|
·
|
Cendant contingent and other corporate liabilities The
Company has assumed 37.5% of corporate liabilities of Cendant
including liabilities relating to (i) Cendants
terminated or divested businesses; (ii) liabilities
relating to the Travelport sale, if any; and
(iii) generally any actions with respect to the Separation
plan or the distributions brought by any third party. The
Companys maximum exposure to loss cannot be quantified as
this guarantee relates primarily to future claims that may be
made against Cendant. The Company assessed the probability and
amount of potential liability related to this guarantee based on
the extent and nature of historical experience.
|
|
|
·
|
Guarantee related to deferred compensation arrangements
In the event that Cendant, Realogy
and/or
Travelport are not able to meet certain deferred compensation
obligations under specified plans for certain current and former
officers and directors because of bankruptcy or insolvency, the
Company has guaranteed such obligations (to the extent relating
to amounts deferred in respect of 2005 and earlier). This
guarantee will remain outstanding until such deferred
compensation balances are distributed to the respective officers
and directors. The maximum exposure cannot be quantified as the
guarantee, in part, is related to the value of deferred
investments as of the date of the requested distribution.
|
Securitized
Conduit Facility
On October 1, 2010, the Company renewed its
364-day,
non-recourse, securitized vacation ownership bank conduit
facility with a term through September 2011. This facility bears
interest at variable rates based on commercial paper rates and
LIBOR rates plus a spread and has a capacity of
$600 million. At the time of closing on October 1,
2010, the $600 million bank conduit facility had available
capacity of $385 million.
Dividend
Declaration
On October 21, 2010, the Companys Board of Directors
declared a dividend of $0.12 per share payable December 10,
2010 to shareholders of record as of November 24, 2010.
Securitization
Term Transaction
On October 21, 2010, the Company closed a series of term
notes payable, Sierra Timeshare
2010-3
Receivables Funding LLC, in the initial principal amount of
$300 million. These borrowings bear interest at a weighted
average coupon rate of 3.67% and are secured by vacation
ownership contract receivables.
27
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
FORWARD-LOOKING
STATEMENTS
This report includes forward-looking statements, as
that term is defined by the Securities and Exchange Commission
(SEC) in its rules, regulations and releases.
Forward-looking statements are any statements other than
statements of historical fact, including statements regarding
our expectations, beliefs, hopes, intentions or strategies
regarding the future. In some cases, forward-looking statements
can be identified by the use of words such as may,
expects, should, believes,
plans, anticipates,
estimates, predicts,
potential, continue, or other words of
similar meaning. Forward-looking statements are subject to risks
and uncertainties that could cause actual results to differ
materially from those discussed in, or implied by, the
forward-looking statements. Factors that might cause such a
difference include, but are not limited to, general economic
conditions, our financial and business prospects, our capital
requirements, our financing prospects, our relationships with
associates and those disclosed as risks under Risk
Factors in Part II, Item 1A of this Report. We
caution readers that any such statements are based on currently
available operational, financial and competitive information,
and they should not place undue reliance on these
forward-looking statements, which reflect managements
opinion only as of the date on which they were made. Except as
required by law, we disclaim any obligation to review or update
these forward-looking statements to reflect events or
circumstances as they occur.
BUSINESS
AND OVERVIEW
We are a global provider of hospitality products and services
and operate our business in the following three segments:
|
|
|
|
·
|
Lodgingfranchises hotels in the upscale, midscale,
economy and extended stay segments of the lodging industry and
provides hotel management services for full-service hotels
globally.
|
|
|
·
|
Vacation Exchange and Rentalsprovides vacation
exchange products and services to owners of intervals of
vacation ownership interests (VOIs) and markets
vacation rental properties primarily on behalf of independent
owners.
|
|
|
·
|
Vacation Ownershipdevelops, markets and sells VOIs
to individual consumers, provides consumer financing in
connection with the sale of VOIs and provides property
management services at resorts.
|
RESULTS
OF OPERATIONS
Discussed below are our key operating statistics, consolidated
results of operations and the results of operations for each of
our reportable segments. The reportable segments presented below
represent our operating segments for which separate financial
information is available and which is utilized on a regular
basis by our chief operating decision maker to assess
performance and to allocate resources. In identifying our
reportable segments, we also consider the nature of services
provided by our operating segments. Management evaluates the
operating results of each of our reportable segments based upon
net revenues and EBITDA. Our presentation of EBITDA may not be
comparable to similarly-titled measures used by other companies.
28
OPERATING
STATISTICS
The following table presents our operating statistics for the
three months ended September 30, 2010 and 2009. During the
first quarter of 2010, our vacation exchange and rentals
business revised its operating statistics in order to improve
transparency and comparability for our investors. The exchange
revenue per member statistic has been expanded to capture
member-related rentals and other servicing fees, which were
previously included within our vacation rental statistics and
other ancillary revenues. Vacation rental transactions and
average net price per vacation rental statistics now include
only European rental transactions. Prior period operating
statistics have been updated to be comparable to the current
presentation. See Results of Operations section for a discussion
as to how these operating statistics affected our business for
the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
Lodging
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of rooms
(a)
|
|
|
605,700
|
|
|
|
590,900
|
|
|
|
3
|
|
RevPAR (b)
|
|
$
|
37.14
|
|
|
$
|
34.81
|
|
|
|
7
|
|
Vacation Exchange and Rentals
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of members (in 000s)
(c)
|
|
|
3,766
|
|
|
|
3,781
|
|
|
|
|
|
Exchange revenue per member
(d)
|
|
$
|
173.44
|
|
|
$
|
173.90
|
|
|
|
|
|
Vacation rental transactions (in 000s)
(e)(f)
|
|
|
322
|
|
|
|
264
|
|
|
|
22
|
|
Average net price per vacation rental
(f)(g)
|
|
$
|
500.31
|
|
|
$
|
594.34
|
|
|
|
(16
|
)
|
Vacation Ownership
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross VOI sales (in 000s)
(h)(i)
|
|
$
|
412,000
|
|
|
$
|
366,000
|
|
|
|
13
|
|
Tours (j)
|
|
|
187,000
|
|
|
|
173,000
|
|
|
|
8
|
|
Volume Per Guest (VPG)
(k)
|
|
$
|
2,081
|
|
|
$
|
1,944
|
|
|
|
7
|
|
|
|
|
(a) |
|
Represents the number of rooms at
lodging properties at the end of the period which are either
(i) under franchise and/or management agreements,
(ii) properties affiliated with the Wyndham Hotels and
Resorts brand for which we receive a fee for reservation and/or
other services provided and (iii) properties managed under
a joint venture. The amounts in 2010 and 2009 include 404 and
3,549 affiliated rooms, respectively. The Tryp hotel brand was
acquired on June 30, 2010 and is, therefore, included in
the number of rooms for the three months ended
September 30, 2010.
|
|
(b) |
|
Represents revenue per available
room and is calculated by multiplying the percentage of
available rooms occupied during the period by the average rate
charged for renting a lodging room for one day. Includes the
impact from the acquisition of the Tryp hotel brand, which was
acquired on June 30, 2010; therefore, such operating
statistics for 2010 are not presented on a comparable basis to
the 2009 operating statistics.
|
|
(c) |
|
Represents members in our vacation
exchange programs who pay annual membership dues. For additional
fees, such participants are entitled to exchange intervals for
intervals at other properties affiliated with our vacation
exchange business. In addition, certain participants may
exchange intervals for other leisure-related products and
services.
|
|
(d) |
|
Represents total revenue generated
from fees associated with memberships, exchange transactions,
member-related rentals and other servicing for the period
divided by the average number of vacation exchange members
during the period.
|
|
(e) |
|
Represents the number of
transactions that are generated in connection with customers
booking their vacation rental stays through us. One rental
transaction is recorded each time a standard one-week rental is
booked.
|
|
(f) |
|
Includes the impact from the
acquisition of Hoseasons, which was acquired on March 1,
2010; therefore, such operating statistics for 2010 are not
presented on a comparable basis to the 2009 operating statistics.
|
|
(g) |
|
Represents the net rental price
generated from renting vacation properties to customers divided
by the number of vacation rental transactions. Excluding the
impact of foreign exchange movements, the average net price per
vacation rental decreased 8%.
|
|
(h) |
|
Represents total sales of VOIs,
including sales under the Wyndham Asset Affiliation Model
(WAAM), before the net effect of
percentage-of-completion
accounting and loan loss provisions. We believe that Gross VOI
sales provides an enhanced understanding of the performance of
our vacation ownership business because it directly measures the
sales volume of this business during a given reporting period.
|
|
(i) |
|
The following table provides a
reconciliation of Gross VOI sales to Vacation ownership interest
sales for the three months ended September 30 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Gross VOI sales
|
|
$
|
412
|
|
|
$
|
366
|
|
Less: WAAM sales
(1)
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross VOI sales, net of WAAM sales
|
|
|
392
|
|
|
|
366
|
|
Plus: Net effect of
percentage-of-completion
accounting
|
|
|
|
|
|
|
36
|
|
Less: Loan loss provision
|
|
|
(85
|
)
|
|
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
Vacation ownership interest sales
(2)
|
|
$
|
308
|
|
|
$
|
285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents total sales of VOIs through our
fee-for-service
vacation ownership sales model designed to offer turn-key
solutions for developers or banks in possession of newly
developed inventory, which we will sell for a commission fee
through our extensive sales and marketing channels.
|
|
|
(2)
|
Amounts may not foot due to rounding.
|
|
|
|
(j) |
|
Represents the number of tours
taken by guests in our efforts to sell VOIs.
|
|
(k) |
|
VPG is calculated by dividing Gross
VOI sales (excluding tele-sales upgrades, which are non-tour
upgrade sales) by the number of tours. Tele-sales upgrades were
$3 million and $29 million during the three months
ended September 30, 2010 and 2009, respectively. We have
excluded non-tour upgrade sales in the calculation of VPG
because non-tour upgrade sales are generated by a different
marketing channel. We believe that VPG provides an enhanced
understanding of the performance of our vacation ownership
business because it directly measures the efficiency of this
business tour selling efforts during a given reporting
period.
|
29
THREE
MONTHS ENDED SEPTEMBER 30, 2010 VS. THREE MONTHS ENDED SEPTEMBER
30, 2009
Our consolidated results are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Net revenues
|
|
$
|
1,065
|
|
|
$
|
1,016
|
|
|
$
|
49
|
|
Expenses
|
|
|
786
|
|
|
|
810
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
279
|
|
|
|
206
|
|
|
|
73
|
|
Other income, net
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
1
|
|
Interest expense
|
|
|
47
|
|
|
|
34
|
|
|
|
13
|
|
Interest income
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
235
|
|
|
|
175
|
|
|
|
60
|
|
Provision for income taxes
|
|
|
79
|
|
|
|
71
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
156
|
|
|
$
|
104
|
|
|
$
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the third quarter of 2010, our net revenues increased
$49 million (5%) principally due to:
|
|
|
|
·
|
a $32 million decrease in our provision for loan losses
primarily due to improved portfolio performance and mix,
partially offset by the impact to the provision from higher
gross VOI sales;
|
|
|
·
|
a $26 million increase in gross sales of VOIs, net of WAAM
sales, primarily reflecting an increase in tour flow and VPG;
|
|
|
·
|
a $20 million increase in net revenues in our lodging
business primarily due to an increase in RevPAR, other franchise
fees and ancillary revenues;
|
|
|
·
|
a favorable impact of $12 million due to commissions earned
on VOI sales under our WAAM;
|
|
|
·
|
$8 million of incremental property management fees within
our vacation ownership business primarily as a result of growth
in the number of units under management; and
|
|
|
·
|
a $4 million increase in net revenues from rental
transactions and related services at our vacation exchange and
rentals business primarily due to incremental revenues
contributed from the March 2010 acquisition of Hoseasons and
higher average net price per vacation rental, partially offset
by an unfavorable impact of foreign exchange movements of
$14 million.
|
Such increases were partially offset by (i) a decrease of
$36 million as a result of the absence of the recognition
of revenues previously deferred under the
percentage-of-completion
(POC) method of accounting due to operational
changes that we made at our vacation ownership business to
eliminate the impact of deferred revenues and (ii) a
$16 million decrease in ancillary revenues at our vacation
ownership business primarily associated with a change in the
classification of revenues related to incidental operations,
which were misclassified on a gross basis during prior periods
and classified on a net basis within operating expenses during
the third quarter of 2010.
Total expenses decreased $24 million (3%) principally
reflecting:
|
|
|
|
·
|
a $52 million net benefit recorded during the third quarter
of 2010 related to the resolution of and adjustment to certain
contingent liabilities and assets primarily due to the
settlement of the IRS examination of Cendants taxable
years 2003 through 2006 on July 15, 2010;
|
|
|
·
|
$15 million primarily associated with a change in the
classification of revenues related to incidental operations,
which were misclassified on a gross basis during prior periods
and classified on a net basis within operating expenses during
the third quarter of 2010;
|
|
|
·
|
a decrease of $14 million of expenses related to the
absence of the recognition of revenues previously deferred at
our vacation ownership business, as discussed above;
|
|
|
·
|
$12 million of decreased costs at our vacation ownership
business due to lower employee and other related expenses and
decreased marketing expenses due to the change in tour mix;
|
|
|
·
|
the favorable impact of $9 million from foreign currency
translation on expenses at our vacation exchange and rentals
business;
|
30
|
|
|
|
·
|
an $8 million decrease in consumer financing interest
expenses primarily related to a decrease in interest rates,
partially offset by higher average borrowings on our securitized
debt facilities; and
|
|
|
·
|
the favorable impact of $3 million from foreign exchange
transactions and foreign exchange hedging contracts at our
vacation exchange and rentals business.
|
These decreases were partially offset by:
|
|
|
|
·
|
$14 million of increased costs at our lodging business
primarily associated with ancillary services provided to
franchisees and a strategic initiative to grow reservation
contribution;
|
|
|
·
|
$11 million of higher sales commission costs resulting from
increased gross VOI sales and rates;
|
|
|
·
|
$10 million of increased costs at our vacation ownership
business associated with maintenance fees on unsold inventory;
|
|
|
·
|
$10 million of higher corporate costs primarily related to
the unfavorable impact from foreign exchange hedging contracts,
higher data security and IT costs and the funding of the Wyndham
charitable foundation;
|
|
|
·
|
$9 million of higher costs at our vacation ownership
business related to our WAAM;
|
|
|
·
|
$7 million of increased costs at our vacation exchange and
rentals business driven by higher value added taxes, as well as
the timing of certain expenses;
|
|
|
·
|
$7 million of incremental property management expenses at
our vacation ownership business primarily associated with the
growth in the number of units under management;
|
|
|
·
|
$7 million of increased cost of VOI sales related to the
increase in gross VOI sales, net of WAAM sales;
|
|
|
·
|
$5 million of increased deed recording costs at our
vacation ownership business;
|
|
|
·
|
a non-cash charge of $4 million recorded at our vacation
ownership business during the third quarter of 2010 to impair
the value of certain vacation ownership properties and related
assets held for sale that were no longer consistent with our
development plans;
|
|
|
·
|
$4 million of incremental costs at our vacation exchange
and rentals business contributed from our acquisition of
Hoseasons; and
|
|
|
·
|
$3 million of increased costs at our vacation ownership
business related to our total membership marketing program.
|
Other income, net decreased $1 million during the third
quarter of 2010 compared to the same period during 2009.
Interest expense increased $13 million during the third
quarter of 2010 compared with the same period during 2009
primarily as a result of costs incurred for the repurchase of a
portion of our 3.50% convertible notes during the third quarter
of 2010. Interest income increased $1 million during the
third quarter of 2010 compared with the same period during 2009
due to higher interest earned as a result of higher average
invested cash balances. Our effective tax rate declined from 41%
during the third quarter of 2009 to 34% during the third quarter
of 2010 primarily due to the benefit derived from the current
utilization of certain cumulative foreign tax credits, which we
were able to realize based on certain changes in our tax
profile, as well as the settlement of the IRS Examination.
As a result of these items, our net income increased
$52 million (50%) as compared to the third quarter of 2009.
During 2010, we expect:
|
|
|
|
·
|
net revenues of approximately $3.7 billion to
$4.0 billion;
|
|
|
·
|
depreciation and amortization of approximately $180 million
to $185 million; and
|
|
|
·
|
interest expense, net (excluding early extinguishment of debt
costs) of approximately $135 million to $145 million.
|
31
Following is a discussion of the results of each of our
segments, other income, net and interest expense/income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
EBITDA
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
Lodging
|
|
$
|
203
|
|
|
$
|
183
|
|
|
11
|
|
$
|
67
|
|
|
$
|
58
|
|
|
16
|
Vacation Exchange and Rentals
|
|
|
330
|
|
|
|
327
|
|
|
1
|
|
|
103
|
|
|
|
107
|
|
|
(4)
|
Vacation Ownership
|
|
|
533
|
|
|
|
508
|
|
|
5
|
|
|
123
|
|
|
|
104
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Reportable Segments
|
|
|
1,066
|
|
|
|
1,018
|
|
|
5
|
|
|
293
|
|
|
|
269
|
|
|
9
|
Corporate and Other
(a)
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
*
|
|
|
30
|
|
|
|
(15
|
)
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company
|
|
$
|
1,065
|
|
|
$
|
1,016
|
|
|
5
|
|
|
323
|
|
|
|
254
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
|
|
46
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
|
|
34
|
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
$
|
235
|
|
|
$
|
175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
|
Not meaningful.
|
|
(a) |
|
Includes the elimination of
transactions between segments.
|
Lodging
Net revenues and EBITDA increased $20 million (11%) and
$9 million (16%), respectively, during the third quarter of
2010 compared to the third quarter of 2009 primarily reflecting
an increase in RevPAR and other franchise fees.
On June 30, 2010, we acquired the Tryp hotel brand, which
resulted in the addition of 92 hotels and approximately 13,200
rooms in Europe and South America. Such acquisition contributed
incremental revenues and EBITDA of $2 million and
$1 million, respectively.
Excluding the impact of this acquisition, net revenues increased
$18 million reflecting:
|
|
|
|
·
|
a $7 million increase in royalty, marketing and reservation
revenues primarily due to a domestic RevPAR increase of 7% as a
result of increased occupancy;
|
|
|
·
|
a $4 million increase in other franchise fees principally
related to termination fees; and
|
|
|
·
|
a $10 million net increase in ancillary revenue primarily
associated with additional services provided to franchisees.
|
Such increases were partially offset by $3 million of lower
reimbursable revenues recorded by our hotel management business
primarily related to payroll costs that we pay on behalf of
hotel owners, for which we are entitled to be fully reimbursed
by the hotel owner. As the reimbursements are made based upon
cost with no added margin, the recorded revenues are offset by
the associated expense and there is no resultant impact on
EBITDA. Such amount decreased as a result of a lower number of
hotels under management during the first two months of the
quarter.
EBITDA further reflects (i) $12 million of increased
costs primarily associated with ancillary services provided to
franchisees and (ii) $2 million of costs incurred
during 2010 relating to our strategic initiative to grow
reservation contribution.
As of September 30, 2010, we had approximately 7,150
properties and 605,700 rooms in our system. Additionally, our
hotel development pipeline included approximately 930 hotels and
approximately 107,500 rooms, of which 47% were international and
54% were new construction as of September 30, 2010.
We expect net revenues of approximately $640 million to
$680 million during 2010. In addition, as compared to 2009,
we expect our operating statistics during 2010 to perform as
follows:
|
|
|
|
·
|
RevPAR to be flat to up 3%; and
|
|
|
·
|
number of rooms (including Tryp) to increase 3-5%.
|
Vacation
Exchange and Rentals
Net revenues increased $3 million (1%) and EBITDA decreased
$4 million (4%), respectively, during the third quarter of
2010 compared with the third quarter of 2009. A stronger
U.S. dollar compared to other foreign currencies
unfavorably impacted net revenues and EBITDA by $14 million
and $5 million, respectively. Net revenues from rental
transactions and related services increased $4 million,
which includes $9 million generated from our acquisition of
Hoseasons. Exchange
32
and related service revenues decreased $1 million primarily
due to lower travel service fees. EBITDA further reflects
$8 million of increased operating expenses and
$4 million of incremental costs contributed from our
acquisition of Hoseasons, partially offset by the favorable
impact from foreign exchange transactions and foreign exchange
hedging contracts of $3 million.
On September 30, 2010, we acquired ResortQuest, which
resulted in the addition of approximately 6,000 vacation rental
properties in the United States. Our vacation exchange and
rentals business now offers its leisure travelers access to more
than 85,000 vacation properties worldwide.
Net revenues generated from rental transactions and related
services increased $4 million (3%) during the third quarter
of 2010 compared to the same period during 2009. The acquisition
of Hoseasons during March 2010 contributed incremental net
revenues and EBITDA of $9 million and $5 million,
respectively. Excluding the impact from the Hoseasons
acquisition and the unfavorable impact of foreign exchange
movements of $14 million, net revenues generated from
rental transactions and related services increased
$9 million (6%) during the third quarter of 2010. Such
increase was driven by a 7% increase in average net price per
vacation rental primarily resulting from (i) favorable
pricing on bookings made close to arrival dates at our Landal
business, (ii) higher pricing at our U.K. and France
destinations through our U.K. cottage business and (iii) a
$5 million increase primarily related to a reclassification
of third-party sales commission fees, which were misclassified
as contra revenue in prior periods, from revenue to operating
expenses. Such impact was partially offset by a 1% decrease in
rental transaction volume during the third quarter of 2010
driven by lower volume at our Novasol business primarily due to
the timing of bookings year on year.
Exchange and related service revenues, which primarily consist
of fees generated from memberships, exchange transactions,
member-related rentals and other member servicing, decreased
$1 million (1%) during the third quarter of 2010 compared
to the same period during 2009 primarily resulting from lower
travel service fees due to the outsourcing of our European
travel services to a third-party provider during the first
quarter of 2010. Average number of members and revenue generated
per member both remained relatively flat during the third
quarter of 2010. The impact on revenue generated per member from
lower travel service fees was offset by the impact of a
$2 million increase related to a reclassification of
third-party credit card processing fees, which were
misclassified as contra revenue in prior periods, from revenue
to operating expenses. Foreign exchange movements did not have a
material impact on exchange and related service revenues.
EBITDA further reflects an increase in expenses of
$3 million (1%) primarily driven by:
|
|
|
|
·
|
$7 million of increased operating expenses driven by higher
value added taxes, as well as the timing of certain expenses;
|
|
|
·
|
$7 million primarily resulting from a reclassification of
third-party sales commission fees and credit card processing
fees, which were misclassified as contra revenue in prior
periods, from revenue to operating expenses; and
|
|
|
·
|
$1 million of costs incurred in connection with our
acquisition of ResortQuest.
|
Such increases were partially offset by (i) the favorable
impact of foreign currency translation on expenses of
$9 million and (ii) the favorable impact of
$3 million from foreign exchange transactions and foreign
exchange hedging contracts.
We expect net revenues of approximately $1.1 billion to
$1.2 billion during 2010. In addition, as compared to 2009,
we expect our operating statistics during 2010 to perform as
follows:
|
|
|
|
·
|
vacation rental transactions to increase
20-23% and
average net price per vacation rental to decrease
12-15%
primarily reflecting increased volumes at lower rental yields
from our Hoseasons and ResortQuest acquisitions; and
|
|
|
·
|
average number of members as well as exchange revenue per member
to be flat.
|
Vacation
Ownership
Net revenues and EBITDA increased $25 million (5%) and
$19 million (18%), respectively, during the third quarter
of 2010 compared with the third quarter of 2009.
The increase in net revenues during the third quarter of 2010
primarily reflects a decline in our provision for loan losses,
an increase in gross VOI sales, higher revenues associated with
property management and commissions earned on VOI sales under
our newly implemented WAAM (see description of WAAM below),
partially offset by the absence of the recognition of previously
deferred revenues during the third quarter of 2009 and lower
ancillary revenues. The increase in EBITDA during the third
quarter of 2010 further reflects the absence of expenses related
to the recognition of previously deferred revenues during the
third quarter of 2009, lower consumer financing interest expense
and decreased employee-related,
33
marketing and litigation expenses, partially offset by higher
sales commission costs, increased costs associated with
maintenance fees on unsold inventory, higher property management
and WAAM related expenses, higher cost of VOI sales and
increased deed recording costs.
Gross sales of VOIs, net of WAAM sales, at our vacation
ownership business increased $26 million (7%) during the
third quarter of 2010 compared to the same period during 2009,
driven principally by an 8% increase in tour flow and a 7%
increase in VPG. Tour flow was positively impacted by better
penetration into our existing owner base and stronger outreach
to new owners, partially offset by the closure of 5 sales
offices after the second quarter of 2009 primarily related to
our organizational realignment initiatives. VPG was positively
impacted by (i) a favorable tour flow mix resulting from
the closure of underperforming sales offices as part of the
organizational realignment and (ii) a higher percentage of
sales coming from upgrades to existing owners during the third
quarter of 2010 as compared to the same period during 2009 as a
result of changes in the mix of tours. Our provision for loan
losses declined $32 million during the third quarter of
2010 as compared to the third quarter of 2009. Such decline
includes (i) $27 million primarily related to improved
portfolio performance and mix during the third quarter of 2010
as compared to the same period during 2009, partially offset by
the impact to the provision from higher gross VOI sales, and
(ii) a $5 million impact on our provision for loan
losses from the absence of the recognition of revenue previously
deferred under the POC method of accounting during the third
quarter of 2009. Such favorability was partially offset by a
$16 million decrease in ancillary revenues primarily
associated with a change in the classification of revenues
related to incidental operations, which were misclassified on a
gross basis during prior periods and classified on a net basis
within operating expenses during the third quarter of 2010.
In addition, net revenues and EBITDA comparisons were favorably
impacted by $12 million and $3 million, respectively,
during the third quarter of 2010 due to commissions earned on
VOI sales of $20 million under our WAAM. During the first
quarter of 2010, we began our initial implementation of WAAM,
which is our
fee-for-service
vacation ownership sales model designed to capitalize upon the
large quantities of newly developed, nearly completed or
recently finished condominium or hotel inventory within the
current real estate market without assuming the investment that
accompanies new construction. We offer turn-key solutions for
developers or banks in possession of newly developed inventory,
which we will sell for a commission fee through our extensive
sales and marketing channels. This model enables us to expand
our resort portfolio with little or no capital deployment, while
providing additional channels for new owner acquisition. In
addition, WAAM may allow us to grow our
fee-for-service
consumer finance servicing operations and property management
business. The commission revenue earned on these sales is
included in service fees and membership revenues on the
Consolidated Statement of Income.
Under the POC method of accounting, a portion of the total
revenues associated with the sale of a VOI is deferred if the
construction of the vacation resort has not yet been fully
completed. Such revenues are recognized in future periods as
construction of the vacation resort progresses. There was no
impact from the POC method of accounting during the third
quarter of 2010 as compared to the recognition of
$36 million of previously deferred revenues during the
third quarter of 2009. Accordingly, net revenues and EBITDA
comparisons were negatively impacted by $31 million
(including the impact of the provision for loan losses) and
$17 million, respectively, as a result of the absence of
the recognition of revenues previously deferred under the POC
method of accounting. We do not anticipate any impact during the
remainder of 2010 on net revenues or EBITDA due to the POC
method of accounting as all such previously deferred revenues
were recognized during 2009. We made operational changes to
eliminate additional deferred revenues during the remainder of
2010.
Our net revenues and EBITDA comparisons associated with property
management were positively impacted by $8 million and
$1 million, respectively, during the third quarter of 2010
primarily due to growth in the number of units under management,
partially offset in EBITDA by increased costs associated with
such growth in the number of units under management.
Net revenues were unfavorably impacted by $1 million and
EBITDA was favorably impacted by $7 million during the
third quarter of 2010 due to lower consumer financing revenues
attributable to a decline in our contract receivable portfolio,
which was more than offset in EBITDA by lower interest costs
during the third quarter of 2010 as compared to the third
quarter of 2009. We incurred interest expense of
$27 million on our securitized debt at a weighted average
interest rate of 6.5% during the third quarter of 2010 compared
to $35 million at a weighted average interest rate of 8.8%
during the third quarter of 2009. Our net interest income margin
increased from 68% during the third quarter of 2009 to 75%
during the third quarter of 2010 due to (i) a
224 basis point decrease in our weighted average interest
rate and (ii) higher weighted average interest rates earned
on our contract receivable portfolio, partially offset by
$62 million of increased average borrowings on our
securitized debt facilities.
In addition, EBITDA was negatively impacted by $12 million
(5%) of increased expenses, exclusive of lower interest expense
on our securitized debt, higher property management expenses and
WAAM related expenses, primarily resulting from:
|
|
|
|
·
|
$11 million of higher sales commission costs resulting from
increased gross VOI sales and rates;
|
|
|
·
|
$10 million of increased costs associated with maintenance
fees on unsold inventory;
|
34
|
|
|
|
·
|
$7 million of increased cost of VOI sales related to the
increase in gross VOI sales, net of WAAM sales;
|
|
|
·
|
$5 million of increased deed recording costs;
|
|
|
·
|
a non-cash charge of $4 million recorded during the third
quarter of 2010 to impair the value of certain vacation
ownership properties and related assets held for sale that were
no longer consistent with our development plans; and
|
|
|
·
|
$3 million of increased costs related to our trial
membership marketing program.
|
Such increases were partially offset by:
|
|
|
|
·
|
$15 million primarily associated with a change in the
classification of revenues related to incidental operations,
which were misclassified on a gross basis during prior periods
and classified on a net basis within operating expenses during
the third quarter of 2010;
|
|
|
·
|
$7 million of decreased employee and other related
expenses; and
|
|
|
·
|
$5 million of decreased marketing expenses due to the
change in tour mix.
|
We expect net revenues of approximately $1.9 billion to
$2.1 billion during 2010. In addition, as compared to 2009,
we expect our operating statistics during 2010 to perform as
follows:
|
|
|
|
·
|
gross VOI sales to be up 7-9%;
|
|
|
·
|
tours to increase 2-4%; and
|
|
|
·
|
VPG to increase
10-14%.
|
Corporate
and Other
Corporate and Other expenses decreased $44 million during
the third quarter of 2010 compared to the same period during
2009 resulting from (i) a $52 million net benefit
recorded during the third quarter of 2010 related to the
resolution of and adjustment to certain contingent liabilities
and assets primarily due to the settlement of the IRS
examination of Cendants taxable years 2003 through 2006 on
July 15, 2010 and (ii) the absence of a
$2 million net expense recorded during the third quarter of
2009 related to the resolution of and adjustment to certain
contingent liabilities and assets.
Such benefit was partially offset by:
|
|
|
|
·
|
$3 million of unfavorable impact from foreign exchange
hedging contracts;
|
|
|
·
|
$3 million of higher data security and IT costs; and
|
|
|
·
|
$2 million of funding of the Wyndham charitable foundation.
|
Other
Income, Net
Other income, net decreased $1 million during the three
months ended September 30, 2010 as compared to the same
period in 2009. Such amount is included within our segment
EBITDA results.
Interest
Expense/Interest Income/Provision for Income Taxes
Interest expense increased $13 million during the three
months ended September 30, 2010 compared with the same
period during 2009 as a result of:
|
|
|
|
·
|
$11 million of costs incurred for the repurchase of a
portion of our 3.50% convertible notes during the third quarter
of 2010;
|
|
|
·
|
a $1 million increase in interest incurred on our long-term
debt facilities, primarily related to our February 2010 and
September 2010 debt issuances, partially offset by lower
interest incurred on our revolving foreign credit facility which
was paid down and terminated during March 2010; and
|
|
|
·
|
a $1 million decrease in capitalized interest at our
vacation ownership business due to lower development of vacation
ownership inventory.
|
Interest income increased $1 million during the third
quarter of 2010 compared with the same period during 2009 due to
higher interest earned as a result of higher average invested
cash balances.
35
Our effective tax rate declined from 41% during the third
quarter of 2009 to 34% during the third quarter of 2010
primarily due to the benefit derived from the current
utilization of certain cumulative foreign tax credits, which we
were able to realize based on certain changes in our tax
profile, as well as the settlement of the IRS Examination.
NINE
MONTHS ENDED SEPTEMBER 30, 2010 VS. NINE MONTHS ENDED SEPTEMBER
30, 2009
Our consolidated results are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Net revenues
|
|
$
|
2,914
|
|
|
$
|
2,837
|
|
|
$
|
77
|
|
Expenses
|
|
|
2,333
|
|
|
|
2,392
|
|
|
|
(59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
581
|
|
|
|
445
|
|
|
|
136
|
|
Other income, net
|
|
|
(6
|
)
|
|
|
(4
|
)
|
|
|
(2
|
)
|
Interest expense
|
|
|
133
|
|
|
|
79
|
|
|
|
54
|
|
Interest income
|
|
|
(3
|
)
|
|
|
(5
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
457
|
|
|
|
375
|
|
|
|
82
|
|
Provision for income taxes
|
|
|
157
|
|
|
|
155
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
300
|
|
|
$
|
220
|
|
|
$
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended September 30, 2010, our net
revenues increased $77 million (3%) principally due to:
|
|
|
|
·
|
an $88 million decrease in our provision for loan losses
primarily due to improved portfolio performance and mix,
partially offset by the impact to the provision from higher
gross VOI sales;
|
|
|
·
|
an $82 million increase in gross sales of VOIs, net of WAAM
sales, reflecting an increase in VPG, partially offset by the
planned reduction in tour flow;
|
|
|
·
|
$23 million of incremental property management fees within
our vacation ownership business primarily as a result of growth
in the number of units under management;
|
|
|
·
|
a favorable impact of $22 million due to commissions earned
on VOI sales under our WAAM;
|
|
|
·
|
a $19 million increase in net revenues from rental
transactions and related services at our vacation exchange and
rentals business due to incremental revenues contributed from
the March 2010 acquisition of Hoseasons and higher average net
price per vacation rental, partially offset by an unfavorable
impact of foreign exchange movements of
$14 million; and
|
|
|
·
|
a $14 million increase in net revenues in our lodging
business primarily due to an increase in international rooms and
ancillary revenues, partially offset by lower reimbursable
revenues;
|
Such increases were partially offset by:
|
|
|
|
·
|
a decrease of $140 million as a result of the absence of
the recognition of revenues previously deferred under the POC
method of accounting due to operational changes that we made at
our vacation ownership business to eliminate the impact of
deferred revenues;
|
|
|
·
|
a $22 million decrease in ancillary revenues at our
vacation ownership business primarily associated with a change
in the classification of revenues related to incidental
operations, which were misclassified on a gross basis during
prior periods and classified on a net basis within operating
expenses during the third quarter of 2010; and
|
|
|
·
|
a $7 million decline in consumer financing revenues due to
a decline in our contract receivable portfolio.
|
Total expenses decreased $59 million (2%) principally
reflecting:
|
|
|
|
·
|
a decrease of $55 million of expenses related to the
absence of the recognition of revenues previously deferred at
our vacation ownership business, as discussed above;
|
|
|
·
|
a $51 million net benefit recorded during the third quarter
of 2010 related to the resolution of and adjustment to certain
contingent liabilities and assets primarily due to the
settlement of the IRS examination of Cendants taxable
years 2003 through 2006 on July 15, 2010;
|
36
|
|
|
|
·
|
the absence of $46 million of costs due to organizational
realignment initiatives across our businesses (see Restructuring
Plan for more details);
|
|
|
·
|
a $22 million decrease in consumer financing interest
expenses primarily related to lower average borrowings on our
securitized debt facilities and a decrease in interest rates;
|
|
|
·
|
$22 million of lower marketing-related expenses primarily
at our lodging business resulting from lower marketing overhead
as well as the timing of certain spend and our vacation
ownership business due to the change in tour mix;
|
|
|
·
|
the favorable impact of $14 million at our vacation
exchange and rentals business from foreign exchange transactions
and foreign exchange hedging contracts;
|
|
|
·
|
$11 million of decreased expenses related to our non-core
vacation ownership businesses;
|
|
|
·
|
$11 million primarily associated with a change in the
classification of revenues related to incidental operations,
which were misclassified on a gross basis during prior periods
and classified on a net basis within operating expenses during
the third quarter of 2010;
|
|
|
·
|
$7 million of decreased payroll costs paid on behalf of
hotel owners in our lodging business;
|
|
|
·
|
the absence of a $6 million net expense recorded during
2009 related to the resolution of and adjustment to certain
contingent liabilities and assets;
|
|
|
·
|
$5 million of lower volume-related and marketing costs at
our vacation exchange and rentals business;
|
|
|
·
|
$4 million of lower non-cash charges to impair the value of
certain vacation ownership properties and related assets held
for sale that were no longer consistent with our development
plans;
|
|
|
·
|
$4 million of lower bad debt expense at our vacation
exchange and rentals business; and
|
|
|
·
|
the favorable impact of foreign currency translation on expenses
of $4 million at our vacation exchange and rentals business.
|
These decreases were partially offset by:
|
|
|
|
·
|
$33 million of increased cost of VOI sales related to the
increase in gross VOI sales, net of WAAM sales;
|
|
|
·
|
$30 million of increased employee and other related
expenses at our vacation ownership business primarily related to
higher sales commission costs resulting from increased VOI sales
and rates;
|
|
|
·
|
$26 million of increased costs at our lodging business
primarily associated with additional services provided to
franchisees and our strategic initiative to grow reservation
contribution;
|
|
|
·
|
$19 million of incremental property management expenses at
our vacation ownership business primarily associated with the
growth in the number of units under management;
|
|
|
·
|
$19 million of increased litigation expenses primarily at
our vacation ownership business;
|
|
|
·
|
$16 million of higher costs at our vacation ownership
business related to our WAAM;
|
|
|
·
|
$15 million of costs incurred at our vacation exchange and
rentals business in connection with our acquisition of Hoseasons;
|
|
|
·
|
$13 million of increased deed recording costs at our
vacation ownership business;
|
|
|
·
|
$10 million of increased costs at our vacation ownership
business associated with maintenance fees on unsold inventory;
|
|
|
·
|
$7 million of increased costs at our vacation exchange and
rentals business primarily related to increased operating
expenses driven by higher value added taxes;
|
|
|
·
|
$7 million of higher bad debt expenses at our lodging
business primarily attributable to receivables relating to
terminated franchisees that are no longer operating a hotel
under one of our 12 brands; and
|
|
|
·
|
$6 million of higher corporate costs primarily related to
higher data security and IT costs, employee-related fees and the
funding of the Wyndham charitable foundation, partially offset
by the favorable impact from foreign exchange hedging contracts.
|
37
Other income, net increased $2 million during the nine
months ended September 30, 2010 compared to the same period
during 2009 primarily as a result of increased ancillary income
related to real estate holdings at our vacation ownership
business. Interest expense increased $54 million during the
nine months ended September 30, 2010 compared with the same
period during 2009 primarily as a result of (i) higher
interest on our long-term debt facilities, primarily related to
our 2010 and May 2009 debt issuances, (ii) $16 million
of early extinguishment costs incurred during the first quarter
of 2010 primarily related to our effective termination of an
interest rate swap agreement in connection with the early
extinguishment of our term loan facility, which resulted in the
reclassification of a $14 million unrealized loss from
accumulated other comprehensive income to interest expense on
our Consolidated Statement of Income and
(iii) $11 million of costs incurred for the repurchase
of a portion of our 3.50% convertible notes during the third
quarter of 2010. Interest income decreased $2 million
during the nine months ended September 30, 2010 compared
with the same period during 2009 due to decreased interest
earned on invested cash balances as a result of lower rates
earned on investments. Our effective tax rate declined from 41%
during the nine months ended September 30, 2009 to 34%
during the nine months ended September 30, 2010 primarily
due to the benefit derived from the current utilization of
certain cumulative foreign tax credits, which we were able to
realize based on certain changes in our tax profile, as well as
the settlement of the IRS Examination.
As a result of these items, our net income increased
$80 million (36%) as compared to the nine months ended
September 30, 2009.
Following is a discussion of the results of each of our
segments, other income, net and interest expense/income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
EBITDA
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
Lodging
|
|
$
|
525
|
|
|
$
|
511
|
|
|
3
|
|
$
|
148
|
|
|
$
|
143
|
|
|
3
|
Vacation Exchange and Rentals
|
|
|
912
|
|
|
|
894
|
|
|
2
|
|
|
261
|
|
|
|
240
|
|
|
9
|
Vacation Ownership
|
|
|
1,483
|
|
|
|
1,437
|
|
|
3
|
|
|
310
|
|
|
|
255
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Reportable Segments
|
|
|
2,920
|
|
|
|
2,842
|
|
|
3
|
|
|
719
|
|
|
|
638
|
|
|
13
|
Corporate and Other
(a)
|
|
|
(6
|
)
|
|
|
(5
|
)
|
|
*
|
|
|
(4
|
)
|
|
|
(55
|
)
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company
|
|
$
|
2,914
|
|
|
$
|
2,837
|
|
|
3
|
|
|
715
|
|
|
|
583
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
128
|
|
|
|
134
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
133
|
|
|
|
79
|
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
$
|
457
|
|
|
$
|
375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
Not meaningful.
|
|
(a) |
|
Includes the elimination of
transactions between segments.
|
Lodging
Net revenues and EBITDA increased $14 million (3%) and
$5 million (3%), respectively, during the nine months ended
September 30, 2010 compared to the same period during 2009
primarily reflecting an increase in rooms, as well as lower
marketing-related expenses, partially offset by higher bad debt
expense and costs incurred during 2010 relating to our strategic
initiative to grow reservation contribution.
On June 30, 2010, we acquired the Tryp hotel brand, which
resulted in the addition of 92 hotels and approximately 13,200
rooms in Europe and South America. Such acquisition contributed
incremental revenues and EBITDA of $2 million and
$1 million, respectively.
Excluding the impact of this acquisition, net revenues increased
$12 million reflecting (i) $3 million of
increased royalty, marketing and reservation revenues resulting
from an 8% increase in international rooms; and (ii) a
$16 million net increase in ancillary revenue primarily
associated with additional services provided to franchisees.
Such increases were partially offset by $7 million of lower
reimbursable revenues recorded by our hotel management business.
The $7 million of lower reimbursable revenues recorded by
our hotel management business primarily relates to payroll costs
that we pay on behalf of hotel owners, for which we are entitled
to be fully reimbursed by the hotel owner. As the reimbursements
are made based upon cost with no added margin, the recorded
revenues are offset by the associated expense and there is no
resultant impact on EBITDA. Such amount decreased as a result of
a lower number of hotels under management during the first eight
months of the year.
38
EBITDA further reflects:
|
|
|
|
·
|
$22 million of increased costs primarily associated with
ancillary services provided to franchisees and to enhance the
international infrastructure to support our growth strategies;
|
|
|
·
|
$7 million of higher bad debt expense which is primarily
attributable to receivables relating to terminated franchisees
that are no longer operating a hotel under one of our 12
brands; and
|
|
|
·
|
$4 million of costs incurred during 2010 relating to our
strategic initiative to grow reservation contribution.
|
Such increased costs were offset by (i) a decrease of
$15 million in marketing-related expenses primarily due to
lower marketing overhead as well as the timing of certain spend
and (ii) the absence of $3 million of costs recorded
during the first quarter of 2009 relating to organizational
realignment initiatives (see Restructuring Plan for more
details).
Vacation
Exchange and Rentals
Net revenues and EBITDA increased $18 million (2%) and
$21 million (9%), respectively, during the nine months
ended September 30, 2010 compared with the same period
during 2009. A stronger U.S. dollar compared to other
foreign currencies unfavorably impacted net revenues and EBITDA
by $9 million and $5 million, respectively. The
increase in net revenues primarily reflects a $19 million
increase in net revenues from rental transactions and related
services, which includes $23 million generated from the
acquisition of Hoseasons. EBITDA further reflects the favorable
impact of $14 million from foreign exchange transactions
and foreign exchange hedging contracts, the absence of
$6 million of costs recorded during the nine months ended
September 30, 2009 relating to organizational realignment
initiatives and $5 million of lower volume-related and
marketing expenses, partially offset by $15 million of
incremental costs incurred from our acquisition of Hoseasons and
$8 million of higher operating expenses.
On September 30, 2010, we acquired ResortQuest, which
resulted in the addition of approximately 6,000 vacation rental
properties in the United States. Our vacation exchange and
rentals business now offers its leisure travelers access to more
than 85,000 vacation properties worldwide.
Net revenues generated from rental transactions and related
services increased $19 million (5%) during the nine months
ended September 30, 2010 compared with the same period
during 2009. The acquisition of Hoseasons during March 2010
contributed incremental net revenues and EBITDA of
$23 million and $8 million, respectively. Excluding
the impact from the Hoseasons acquisition and the unfavorable
impact of foreign exchange movements of $14 million, net
revenues generated from rental transactions and related services
increased $10 million (3%) during the nine months ended
September 30, 2010 driven by a 4% increase in average net
price per vacation rental resulting from (i) favorable
pricing on bookings made close to arrival dates at our Landal
business, (ii) higher pricing at our U.K. and France
destinations through our U.K. cottage business,
(iii) increased commissions on new properties at our U.K.
cottage business and (iv) a $5 million increase
primarily related to a reclassification of third-party sales
commission fees, which were misclassified as contra revenue in
prior periods, from revenue to operating expenses. Such impact
was partially offset by a 1% decrease in rental transaction
volume driven by lower volume at our Landal GreenParks business
as we believe that poor weather conditions negatively impacted
vacation stays during 2010.
Exchange and related service revenues, which primarily consist
of fees generated from memberships, exchange transactions,
member-related rentals and other member servicing, decreased
$1 million during the nine months ended September 30,
2010 compared with the same period during 2009. Excluding the
favorable impact of foreign exchange movements of
$5 million, exchange and related service revenues decreased
$6 million (1%) driven by a 1% decrease in the average
number of members primarily due to lower enrollments from
affiliated resort developers during 2010. Exchange revenue per
member remained relatively flat as the impact from lower travel
services fees due to the outsourcing of our European travel
services to a third-party provider during the first quarter of
2010 was offset by higher exchange and points transaction
revenues resulting from favorable pricing and the impact of a
$2 million increase related to a reclassification of
third-party credit card processing fees, which were
misclassified as contra revenue in prior periods, from revenue
to operating expenses.
EBITDA further reflects a decrease in expenses of
$18 million (3%) primarily driven by:
|
|
|
|
·
|
the favorable impact of $14 million from foreign exchange
transactions and foreign exchange hedging contracts;
|
|
|
·
|
the absence of $6 million of costs recorded during the nine
months ended September 30, 2009 relating to organizational
realignment initiatives (see Restructuring Plan for more
details);
|
|
|
·
|
$5 million of lower volume-related and marketing costs;
|
|
|
·
|
$4 million of lower bad debt expenses; and
|
|
|
·
|
the favorable impact of foreign currency translation on expenses
of $4 million.
|
39
Such decreases were partially offset by:
|
|
|
|
·
|
$7 million of increased operating expenses, which includes
higher value added taxes;
|
|
|
·
|
$7 million primarily resulting from a reclassification of
third-party sales commission fees and credit card processing
fees, which were misclassified as contra revenue in prior
periods, from revenue to operating expenses; and
|
|
|
·
|
$1 million of costs incurred in connection with our
acquisition of ResortQuest.
|
Vacation
Ownership
Net revenues and EBITDA increased $46 million (3%) and
$55 million (22%), respectively, during the nine months
ended September 30, 2010 compared with the same period
during 2009.
The increase in net revenues during the nine months ended
September 30, 2010 primarily reflects a decline in our
provision for loan losses, an increase in gross VOI sales,
higher revenues associated with property management and
commissions earned on VOI sales under our newly implemented
WAAM, partially offset by the absence of the recognition of
previously deferred revenues during the nine months ended
September 30, 2009 and lower ancillary revenues. The
increase in EBITDA during the nine months ended
September 30, 2010 further reflects the absence of expenses
related to the recognition of previously deferred revenues
during the nine months ended September 30, 2009, the
absence of costs related to organizational realignment
initiatives, lower consumer financing interest expense, lower
marketing expenses and a decline in non-cash impairment charges,
partially offset by increased cost of VOI sales, higher
employee-related costs, an increase in property management
expenses, higher litigation expenses, WAAM related expenses,
higher deed recording costs and increased costs associated with
maintenance fees on unsold inventory.
Gross sales of VOIs, net of WAAM sales, at our vacation
ownership business increased $82 million (8%) during the
nine months ended September 30, 2010 compared to the same
period during 2009, driven principally by an increase of 16% in
VPG. VPG was positively impacted by (i) a favorable tour
flow mix resulting from the closure of underperforming sales
offices as part of the organizational realignment and
(ii) a higher percentage of sales coming from upgrades to
existing owners during nine months ended September 30, 2010
as compared to the same period during 2009 as a result of
changes in the mix of tours. Tour flow remained flat as the
favorable impact from growth in our in-house sales programs was
offset by the negative impact of the closure of over 25 sales
offices during 2009 primarily related to our organizational
realignment initiatives. Our provision for loan losses declined
$88 million during the nine months ended September 30,
2010 as compared to the same period during 2009. Such decline
includes (i) $69 million primarily related to improved
portfolio performance and mix during the nine months ended
September 30, 2010 as compared to the same period during
2009, partially offset by the impact to the provision from
higher gross VOI sales, and (ii) a $19 million impact
on our provision for loan losses from the absence of the
recognition of revenue previously deferred under the POC method
of accounting during the nine months ended September 30,
2009. Such favorability was partially offset by a
$22 million decrease in ancillary revenues primarily
associated with a change in the classification of revenues
related to incidental operations, which were misclassified on a
gross basis during prior periods and classified on a net basis
within operating expenses during the third quarter of 2010.
In addition, net revenues and EBITDA comparisons were favorably
impacted by $22 million and $6 million, respectively,
during the nine months ended September 30, 2010 due to
commissions earned on VOI sales of $37 million under our
WAAM. During the first quarter of 2010, we began our initial
implementation of WAAM, which is our
fee-for-service
vacation ownership sales model designed to capitalize upon the
large quantities of newly developed, nearly completed or
recently finished condominium or hotel inventory within the
current real estate market without assuming the investment that
accompanies new construction. We offer turn-key solutions for
developers or banks in possession of newly developed inventory,
which we will sell for a commission fee through our extensive
sales and marketing channels. This model enables us to expand
our resort portfolio with little or no capital deployment, while
providing additional channels for new owner acquisition. In
addition, WAAM may allow us to grow our
fee-for-service
consumer finance servicing operations and property management
business. The commission revenue earned on these sales is
included in service fees and membership revenues on the
Consolidated Statement of Income.
Under the POC method of accounting, a portion of the total
revenues associated with the sale of a VOI is deferred if the
construction of the vacation resort has not yet been fully
completed. Such revenues are recognized in future periods as
construction of the vacation resort progresses. There was no
impact from the POC method of accounting during the nine months
ended September 30, 2010 as compared to the recognition of
$140 million of previously deferred revenues during the
nine months ended September 30, 2009. Accordingly, net
revenues and EBITDA comparisons were negatively impacted by
$120 million (including the impact of the provision for
loan losses) and $65 million, respectively, as a result of
the absence of the recognition of revenues previously deferred
under the POC method of accounting. We do not anticipate any
40
impact during the remainder of 2010 on net revenues or EBITDA
due to the POC method of accounting as all such previously
deferred revenues were recognized during 2009. We made
operational changes to eliminate additional deferred revenues
during the remainder of 2010.
Our net revenues and EBITDA comparisons associated with property
management were positively impacted by $23 million and
$4 million, respectively, during the nine months ended
September 30, 2010 primarily due to growth in the number of
units under management, partially offset in EBITDA by increased
costs associated with such growth in the number of units under
management.
Net revenues were unfavorably impacted by $7 million and
EBITDA was favorably impacted by $15 million during the
nine months ended September 30, 2010 due to lower consumer
financing revenues attributable to a decline in our contract
receivable portfolio, more than offset in EBITDA by lower
interest costs during the nine months ended September 30,
2010 as compared to the same period during 2009. We incurred
interest expense of $80 million on our securitized debt at
a weighted average interest rate of 7.2% during the nine months
ended September 30, 2010 compared to $102 million at a
weighted average interest rate of 8.2% during the nine months
ended September 30, 2009. Our net interest income margin
increased from 69% during the nine months ended
September 30, 2009 to 75% during the nine months ended
September 30, 2010 due to:
|
|
|
|
·
|
a 100 basis point decrease in our weighted average interest
rate;
|
|
|
·
|
$134 million of decreased average borrowings on our
securitized debt facilities; and
|
|
|
·
|
higher weighted average interest rates earned on our contract
receivable portfolio.
|
In addition, EBITDA was negatively impacted by $33 million
(4%) of increased expenses, exclusive of lower interest expense
on our securitized debt, higher property management expenses and
WAAM related expenses, primarily resulting from:
|
|
|
|
·
|
$33 million of increased cost of VOI sales related to the
increase in gross VOI sales, net of WAAM sales;
|
|
|
·
|
$30 million of increased employee and other related
expenses primarily due to higher sales commission costs
resulting from increased gross VOI sales and rates;
|
|
|
·
|
$19 million of increased litigation expenses;
|
|
|
·
|
$13 million of increased deed recording costs; and
|
|
|
·
|
$10 million of increased costs associated with maintenance
fees on unsold inventory.
|
Such increases were partially offset by:
|
|
|
|
·
|
the absence of $36 million of costs recorded during the
nine months ended September 30, 2009 relating to
organizational realignment initiatives (see Restructuring Plan
for more details);
|
|
|
·
|
$11 million of decreased expenses related to our non-core
businesses;
|
|
|
·
|
$11 million primarily associated with a change in the
classification of revenues related to incidental operations,
which were misclassified on a gross basis during prior periods
and classified on a net basis within operating expenses during
the third quarter of 2010;
|
|
|
·
|
$7 million of decreased marketing expenses due to the
change in tour mix; and
|
|
|
·
|
$4 million of lower non-cash charges to impair the value of
certain vacation ownership properties and related assets held
for sale that were no longer consistent with our development
plans.
|
Corporate
and Other
Corporate and Other expenses decreased $52 million during
the nine months ended September 30, 2010 compared to the
same period during 2009 primarily resulting from:
|
|
|
|
·
|
a $51 million net benefit recorded during 2010 related to
the resolution of and adjustment to certain contingent
liabilities and assets primarily due to the settlement of the
IRS examination of Cendants taxable years 2003 through
2006 on July 15, 2010;
|
|
|
·
|
the absence of a $6 million net expense recorded during
2009 related to the resolution of and adjustment to certain
contingent liabilities and assets;
|
|
|
·
|
$5 million of favorable impact from foreign exchange
hedging contracts;
|
41
|
|
|
|
·
|
$2 million resulting from the absence of severance recorded
during 2009; and
|
|
|
·
|
the absence of $1 million of costs recorded during 2009
relating to organizational realignment initiatives (see
Restructuring Plan for more details).
|
Such decreases were partially offset by:
|
|
|
|
·
|
$6 million of higher data security and IT costs;
|
|
|
·
|
$4 million of funding of the Wyndham charitable
foundation; and
|
|
|
·
|
$4 million of employee related expenses.
|
Other
Income, Net
Other income, net increased $2 million during the nine
months ended September 30, 2010 as compared to the same
period in 2009 primarily as a result of increased ancillary
income related to real estate holdings at our vacation ownership
business. Such amounts are included within our segment EBITDA
results.
Interest
Expense/Interest Income/Provision for Income Taxes
Interest expense increased $54 million during the nine
months ended September 30, 2010 compared with the same
period during 2009 as a result of:
|
|
|
|
·
|
a $23 million increase in interest incurred on our
long-term debt facilities, primarily related to our May 2009,
February 2010 and September 2010 debt issuances;
|
|
|
·
|
our termination of an interest rate swap agreement related to
the early extinguishment of our term loan facility during the
first quarter of 2010, which resulted in the reclassification of
a $14 million unrealized loss from accumulated other
comprehensive income to interest expense on our Consolidated
Statement of Income;
|
|
|
·
|
$11 million of costs incurred for the repurchase of a
portion of our 3.50% convertible notes during the third quarter
of 2010;
|
|
|
·
|
a $4 million decrease in capitalized interest at our
vacation ownership business due to lower development of vacation
ownership inventory; and
|
|
|
·
|
an additional $2 million of costs, which are included
within interest expense on our Consolidated Statement of Income,
recorded during the first quarter of 2010 in connection with the
early extinguishment of our term loan and revolving foreign
credit facilities.
|
Interest income decreased $2 million during the nine months
ended September 30, 2010 compared with the same period
during 2009 due to decreased interest earned on invested cash
balances as a result of lower rates earned on investments.
Our effective tax rate declined from 41% during the nine months
ended September 30, 2009 to 34% during the nine months
ended September 30, 2010 primarily due to the benefit
derived from the current utilization of certain cumulative
foreign tax credits, which we were able to realize based on
certain changes in our tax profile, as well as the settlement of
the IRS Examination.
RESTRUCTURING
PLAN
In response to a deteriorating global economy, during 2008, we
committed to various strategic realignment initiatives targeted
principally at reducing costs, enhancing organizational
efficiency, reducing our need to access the asset-backed
securities market and consolidating and rationalizing existing
processes and facilities. As a result, we recorded
$46 million in restructuring costs during the nine months
ended September 30, 2009. Such strategic realignment
initiatives included:
Lodging
The operational realignment of our lodging business enhanced its
global franchisee services, promoted more efficient channel
management to further drive revenue at franchised locations and
managed properties and positioned the Wyndham brand
appropriately and consistently in the marketplace. As a result
of these changes, we recorded costs of $3 million during
the nine months ended September 30, 2009 primarily related
to the elimination of certain positions and the related
severance benefits and outplacement services that were provided
for impacted employees.
42
Vacation
Exchange and Rentals
Our strategic realignment in our vacation exchange and rentals
business streamlined exchange operations primarily across its
international businesses by reducing management layers to
improve regional accountability. As a result of these
initiatives, we recorded restructuring costs of $6 million
during nine months ended September 30, 2009.
Vacation
Ownership
Our vacation ownership business refocused its sales and
marketing efforts by closing the least profitable sales offices
and eliminating marketing programs that were producing prospects
with lower credit quality. Consequently, we decreased the level
of timeshare development, reduced our need to access the
asset-backed securities market and enhanced cash flow. Such
realignment included the elimination of certain positions, the
termination of leases of certain sales offices, the termination
of development projects and the write-off of assets related to
the sales offices and cancelled development projects. These
initiatives resulted in costs of $36 million during the
nine months ended September 30, 2009.
Corporate
and Other
We identified opportunities at our corporate business to reduce
costs by enhancing organizational efficiency and consolidating
and rationalizing existing processes. As a result, we recorded
$1 million in restructuring costs during the nine months
ended September 30, 2009.
Total
Company
During the nine months ended September 30, 2009, as a
result of these strategic realignments, we recorded
$46 million, of incremental restructuring costs related to
such realignments, including a reduction of approximately
370 employees. During the nine months ended
September 30, 2010, we reduced our liability with
$9 million of cash payments. The remaining liability of
$13 million as of September 30, 2010 is expected to be
paid in cash; $12 million of facility-related by September
2017 and $1 million of personnel-related by December 2010.
We began to realize the benefits of these strategic realignment
initiatives during the fourth quarter of 2008 and realized net
savings of approximately $120 million during the nine
months ended September 30, 2010. We anticipate continued
annual net savings from such initiatives of approximately
$160 million.
FINANCIAL
CONDITION, LIQUIDITY AND CAPITAL RESOURCES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Total assets
|
|
$
|
9,213
|
|
|
$
|
9,352
|
|
|
$
|
(139
|
)
|
Total liabilities
|
|
|
6,302
|
|
|
|
6,664
|
|
|
|
(362
|
)
|
Total stockholders equity
|
|
|
2,911
|
|
|
|
2,688
|
|
|
|
223
|
|
Total assets decreased $139 million from December 31,
2009 to September 30, 2010 due to:
|
|
|
|
·
|
a $69 million decrease in vacation ownership contract
receivables, net as a result of a decline in VOI sales financed;
|
|
|
·
|
a $69 million decrease in inventory primarily due to
increased VOI sales and a reduction in the development of
vacation ownership resorts;
|
|
|
·
|
a $55 million decrease in trade receivables, net, primarily
due to seasonality at our European vacation rental businesses
and the impact of foreign currency translation at our vacation
exchange and rentals business, partially offset by the
acquisitions of Hoseasons and ResortQuest;
|
|
|
·
|
a $45 million decrease in deferred income taxes primarily
attributable to the utilization of alternative minimum tax
credits;
|
|
|
·
|
a $17 million decrease in other current assets primarily
due to decreased assets available for sale resulting from the
sale of a vacation ownership property and related assets that
were no longer consistent with our development plans, lower
other receivables at our lodging business primarily due to
collections on payment plans related to ancillary services
provided to franchisees, a decline in other receivables at our
vacation ownership business related to lower revenues from
ancillary services and the amortization of deferred financing
costs related to our 2008 bank conduit facility at our vacation
ownership business, partially offset by increased current
securitized restricted cash resulting from the timing of cash
that we are required to set aside in connection with additional
vacation ownership contract receivables securitizations,
increased current escrow
|
43
|
|
|
|
|
deposit restricted cash related to the acquisition of
ResortQuest and increased current escrow deposit restricted cash
at our vacation ownership business primarily related to higher
VOI sales;
|
|
|
|
|
·
|
a $14 million decrease in other non-current assets
primarily due to decreased deferred expenses related to sales
incentives awarded to owners at our vacation ownership business
and the settlement of a portion of our call options in
connection with the repurchase of our 3.50% convertible notes,
partially offset by an increase in the fair value of our call
option transaction entered into concurrent with the issuance of
the convertible notes, which is discussed in greater detail in
Note 7Long-Term Debt and Borrowing Arrangements and
increased deferred financing costs as a result of the debt
issuances during 2010;
|
|
|
·
|
$14 million of decreased prepaid expenses due to decreases
in prepaid commissions, prepaid maintenance fees on unsold
inventory and prepaid marketing expenses at our vacation
ownership business; and
|
|
|
·
|
an $11 million decrease in property and equipment primarily
related to the depreciation of property and equipment and the
impact of foreign currency translation at our vacation exchange
and rentals business, partially offset by capital expenditures
for the improvement of technology and maintenance of
technological advantages.
|
Such decreases were partially offset by:
|
|
|
|
·
|
a $62 million increase in trademarks, net primarily as a
result of the acquisitions of Hoseasons, the Tryp hotel brand
and ResortQuest;
|
|
|
·
|
a $46 million net increase in goodwill related to the
acquisitions of Hoseasons, the Tryp hotel brand and ResortQuest,
partially offset by the impact of foreign currency translation
at our vacation exchange and rentals business;
|
|
|
·
|
a $32 million increase in franchise agreements and other
intangibles, net, primarily related to the acquisitions of
Hoseasons, the Tryp hotel brand and ResortQuest, partially
offset by the amortization of franchise agreements at our
lodging business; and
|
|
|
·
|
an increase of $15 million in cash and cash equivalents,
which is discussed in further detail in Liquidity and
Capital ResourcesCash Flows.
|
Total liabilities decreased $362 million primarily due to:
|
|
|
|
·
|
a $205 million decrease in due to former Parent and
subsidiaries primarily due to the settlement of the IRS
examination of Cendants taxable years 2003 through 2006;
|
|
|
·
|
a $173 million decrease in deferred income taxes primarily
attributable to an installment sale recognition adjustment
resulting from the IRS Settlement, partially offset by a change
in the expected timing of the utilization of alternative minimum
credits;
|
|
|
·
|
an $89 million decrease in deferred income primarily
resulting from the impact of the recognition of revenues related
to our vacation ownership trial membership marketing program and
decreased deferred revenue at our vacation exchange and rentals
business;
|
|
|
·
|
a $45 million decrease in accounts payable primarily due to
seasonality at our European vacation rental businesses,
partially offset by the acquisitions of Hoseasons and
ResortQuest; and
|
|
|
·
|
a net decrease of $14 million in our other long-term debt
primarily reflecting the early extinguishment of our
$300 million term loan facility during March 2010, a
$188 million decrease related to the repurchase of a
portion of our 3.50% convertible notes, net principal payments
on our other long-term debt with operating cash of
$63 million and a $7 million impact due to foreign
currency translation, partially offset by the issuance of our
$250 million 5.75% senior unsecured notes and
$250 million 7.375% senior unsecured notes, a
$26 million net increase in outstanding borrowings on our
corporate revolver and a $5 million net increase in our
derivative liability related to the bifurcated conversion
feature entered into concurrent with the sale of our convertible
notes, which is discussed in greater detail in
Note 7Long-Term Debt and Borrowing Arrangements.
|
Such decreases were partially offset by (i) a
$108 million net increase in our securitized vacation
ownership debt (see Note 7Long-Term Debt and
Borrowing Arrangements) and (ii) a $64 million
increase in accrued expenses and other current liabilities
primarily due to higher accrued interest on our non-securitized
long-term debt, higher accrued marketing and information
technology expenses at our lodging business and increased
litigation expenses at our vacation ownership business.
44
Total stockholders equity increased $223 million
primarily due to:
|
|
|
|
·
|
$300 million of net income generated during the nine months
ended September 30, 2010;
|
|
|
·
|
$190 million related to the reversal of net deferred tax
liabilities from our former Parent;
|
|
|
·
|
a $36 million impact resulting from the exercise of stock
options during the nine months ended September 30, 2010;
|
|
|
·
|
an $11 million increase to our pool of excess tax benefits
available to absorb tax deficiencies due to the vesting of
equity awards;
|
|
|
·
|
a $10 million impact resulting from (i) the
reclassification of an $8 million after-tax unrealized loss
associated with the termination of an interest rate swap
agreement in connection with the early extinguishment of our
term loan facility during the first quarter of 2010 (see
Note 7Long-Term Debt and Borrowing Arrangements) and
(ii) $2 million of unrealized gains on cash flow
hedges; and
|
|
|
·
|
a change of $8 million in deferred equity compensation.
|
Such increases were partially offset by:
|
|
|
|
·
|
$191 million of treasury stock purchased through our stock
repurchase program;
|
|
|
·
|
$75 million for the repurchase of warrants; and
|
|
|
·
|
$67 million related to dividends.
|
LIQUIDITY
AND CAPITAL RESOURCES
Currently, our financing needs are supported by cash generated
from operations and borrowings under our revolving credit
facility. In addition, certain funding requirements of our
vacation ownership business are met through the issuance of
securitized debt to finance vacation ownership contract
receivables. We believe that our net cash from operations, cash
and cash equivalents, access to our revolving credit facility
and continued access to the securitization and debt markets
provide us with sufficient liquidity to meet our ongoing needs.
During March 2010, we replaced our five-year $900 million
revolving credit facility with a $950 million revolving
credit facility that expires on October 1, 2013. During
October 2010, we renewed our
364-day,
non-recourse, securitized vacation ownership bank conduit
facility, with a term through September 2011 and total capacity
of $600 million.
We may, from time to time, depending on market conditions and
other factors, repurchase our outstanding indebtedness,
including our convertible notes, whether or not such
indebtedness trades above or below its face amount, for cash
and/or in
exchange for other securities or other consideration, in each
case in open market purchases
and/or
privately negotiated transactions.
CASH
FLOWS
During the nine months ended September 30, 2010 and 2009,
we had a net change in cash and cash equivalents of
$15 million and $34 million, respectively. The
following table summarizes such changes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
Cash provided by/(used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
528
|
|
|
$
|
569
|
|
|
$
|
(41
|
)
|
Investing activities
|
|
|
(260
|
)
|
|
|
(138
|
)
|
|
|
(122
|
)
|
Financing activities
|
|
|
(255
|
)
|
|
|
(411
|
)
|
|
|
156
|
|
Effects of changes in exchange rate on cash and cash equivalents
|
|
|
2
|
|
|
|
14
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
$
|
15
|
|
|
$
|
34
|
|
|
$
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities
During the nine months ended September 30, 2010, net cash
provided by operating activities decreased $41 million as
compared to the nine months ended September 30, 2009, which
principally reflects:
|
|
|
|
·
|
a $118 million increase in payments to former Parent and
subsidiaries primarily related to contingent tax liabilities,
including the net payment of $145 million
($155 million paid less $10 million received from
|
45
|
|
|
|
|
Realogy) to Cendant, who is the taxpayer, partially offset by
the absence of $37 million in payments made for contingent
litigation liabilities during 2009;
|
|
|
|
|
·
|
an $88 million decline in our provision for loan losses
primarily related to improved portfolio performance and mix and
the absence of the recognition of revenue previously deferred
under the POC method of accounting;
|
|
|
·
|
$37 million of lower cash inflows from trade receivables
primarily due to lower collections associated with the 2009
planned reduction of ancillary revenues at our vacation
ownership business and an increase in trade receivables at our
lodging business primarily due to an increase in
revenues; and
|
|
|
·
|
$24 million related to higher originations of vacation
ownership contract receivables primarily related to an increase
in VOI sales.
|
Such decreases in cash inflows were partially offset by:
|
|
|
|
·
|
a $132 million increase in deferred income related to the
absence of the recognition of revenue previously deferred under
the POC method of accounting during the nine months ended
September 30, 2009;
|
|
|
·
|
$82 million of lower investments in inventory primarily
related to the planned reduction in development of resorts for
VOI sales; and
|
|
|
·
|
an $18 million increase in non-cash interest primarily due
to our termination of an interest rate swap agreement related to
the early extinguishment of our term loan facility during the
first quarter of 2010, which resulted in the reclassification of
a $14 million unrealized loss from accumulated other
comprehensive income to interest expense on our Consolidated
Statement of Income.
|
Investing
Activities
During the nine months ended September 30, 2010, net cash
used in investing activities increased $122 million as
compared with the nine months ended September 30, 2009,
which principally reflects:
|
|
|
|
·
|
higher acquisition-related payments of $159 million
primarily related to the acquisitions of Hoseasons, the Tryp
hotel brand and ResortQuest; and
|
|
|
·
|
an increase of $7 million in cash outflows from escrow
deposits restricted cash primarily due to the absence of the
utilization of restricted cash during the nine months ended
September 30, 2009 for renovations at one of our vacation
exchange and rentals location and timing differences between our
deeding and sales processes for certain VOI sales.
|
Such increases in cash outflows were partially offset by:
|
|
|
|
·
|
a decrease of $21 million in cash outflows from securitized
restricted cash primarily due to the timing of cash that we are
required to set aside in connection with additional vacation
ownership contract receivable securitizations;
|
|
|
·
|
a $17 million increase in proceeds from asset sales
primarily related to the sale of certain vacation ownership and
vacation exchange and rental properties that were no longer
consistent with our development plans; and
|
|
|
·
|
a decrease of $9 million in property and equipment
additions primarily due to the absence of 2009 leasehold
improvements related to the consolidation of two leased
facilities into one and lower expenditures at our lodging and
vacation ownership businesses, partially offset by the new
construction of bungalows at our Landal parks and improvements
of technology used to drive members to our vacation exchange and
rental web-sites.
|
Financing
Activities
During the nine months ended September 30, 2010, net cash
used in financing activities decreased $156 million as
compared with the nine months ended September 30, 2009,
which principally reflects:
|
|
|
|
·
|
$315 million of higher net proceeds related to securitized
vacation ownership debt;
|
|
|
·
|
$162 million of higher net proceeds related to
non-securitized borrowings;
|
|
|
·
|
$61 million of higher net proceeds resulting from the
settlement of a portion of our 2009 convertible note hedge and
warrant transactions;
|
46
|
|
|
|
·
|
$36 million of higher proceeds received in connection with
stock option exercises during the nine months ended
September 30, 2010;
|
|
|
·
|
$34 million of higher proceeds related to issuances of
notes; and
|
|
|
·
|
higher tax benefits of $14 million from the exercise and
vesting of equity awards.
|
Such decreases in cash outflows were partially offset by:
|
|
|
|
·
|
$197 million related to the repurchase of a portion of our
convertible notes;
|
|
|
·
|
$188 million spent on our stock repurchase program;
|
|
|
·
|
$43 million of additional dividends paid to shareholders;
|
|
|
·
|
$23 million of tax withholdings related to the net share
settlement of vested restricted stock units; and
|
|
|
·
|
$13 million of incremental debt issuance costs primarily
related to our new $950 million revolving credit facility.
|
We utilized some our cash flow to retire a portion of our
convertible debt and settle a related portion of call options
and warrants. During the third quarter of 2010, we repurchased
approximately 40%, or $92 million face value, of our
$230 million 3.50% convertible notes that had a carrying
value of $188 million ($81 million for the portion of
convertible notes, including the unamortized discount, and
$107 million for the related bifurcated conversion feature)
for $197 million. Concurrent with the repurchase, the
Company settled (i) a portion of the call options for
proceeds of $105 million and (ii) a portion of the
warrants with payments of $75 million. As a result of these
transactions, we made net payments of $167 million and
incurred total losses of $11 million during the third
quarter of 2010. This transaction reduced the number of warrants
related to the convertible transaction by approximately
7 million and, as such, we had approximately
11 million warrants outstanding as of September 30,
2010. As the warrants had a dilutive effect when our common
stock price exceeded the warrant strike price of $19.95 per
share, this transaction will result in reduced future share
dilution if our common stock price continues to exceed the
warrant strike price. In addition, this transaction is expected
to create economic value as we believe that our common stock
price will increase, resulting in a benefit that will exceed the
cost of purchasing these warrants.
We utilized the proceeds from our September 2010 debt issuance
to reduce our outstanding indebtedness including repaying
borrowings under our revolving credit facility and for general
corporate purposes. For further detailed information about such
borrowings, see Note 7Long-Term Debt and Borrowing
Arrangements.
We utilized the proceeds from our February 2010 debt issuance to
pay down our revolving foreign credit facility and to reduce the
outstanding balance of our term loan facility. The remainder of
the term loan facility balance was repaid with borrowings under
our revolving credit facility. For further detailed information
about such borrowings, see Note 7Long-Term Debt and
Borrowing Arrangements.
Capital
Deployment
We intend to continue to invest in select capital improvements
and technological improvements in our lodging, vacation
ownership, vacation exchange and rentals and corporate
businesses. In addition, we may seek to acquire additional
franchise agreements, hotel/property management contracts and
exclusive agreements for vacation rental properties on a
strategic and selective basis, either directly or through
investments in joint ventures. We are focusing on optimizing
cash flow and seeking to deploy capital for the highest possible
returns. Ultimately, our business objective is to transform our
cash and earnings profile, primarily by rebalancing the cash
streams to achieve a greater proportion of EBITDA from our
fee-for-service
businesses.
We spent $109 million on capital expenditures, equity
investments and development advances during the nine months
ended September 30, 2010 including $100 million on the
improvement of technology and maintenance of technological
advantages and routine improvements and $9 million of
equity investments and development advances. We anticipate
spending approximately $175 million to $200 million on
capital expenditures, equity investments and development
advances during 2010. In addition, we spent $77 million
relating to vacation ownership development projects during the
nine months ended September 30, 2010. We believe that our
vacation ownership business currently has adequate finished
inventory on our balance sheet to support vacation ownership
sales through 2012. Beginning in 2010, we plan to spend
approximately $100 million to $125 million annually
through 2014 in order to complete vacation ownership projects
currently under development and believe such inventory will be
adequate through 2014. We expect that the majority of the
expenditures that will be required to pursue our capital
spending programs, strategic investments and vacation ownership
development projects will be financed with cash flow generated
through operations. Additional expenditures are financed
47
with general unsecured corporate borrowings, including through
the use of available capacity under our $950 million
revolving credit facility.
Stock
Repurchase Program
We expect to generate annual net cash provided by operating
activities less capital expenditures, equity investments and
development advances at the upper end of a range of
approximately $500 million to $600 million during 2010
and approximately $600 million to $700 million
annually over the next several years, excluding the
2010 net cash payment of $145 million related to the
settlement of IRS contingent liabilities that we assumed and
were responsible for pursuant to our separation from Cendant. A
portion of this cash flow is expected to be returned to our
shareholders in the form of share repurchases. On
August 20, 2007, our Board of Directors authorized a stock
repurchase program that enables us to purchase up to
$200 million of our common stock. Under such program, we
repurchased 2,155,783 shares at an average price of $26.89
for a cost of $58 million and repurchase capacity increased
$13 million from proceeds received from stock option
exercises as of December 31, 2009. On July 22, 2010,
our Board of Directors increased the authorization for the stock
repurchase program by $300 million. During the nine months
ended September 30, 2010, we repurchased
7,709,122 shares at an average price of $24.78 for a cost
of $191 million and repurchase capacity increased
$36 million from proceeds received from stock option
exercises. Such repurchase capacity will continue to be
increased by proceeds received from future stock option
exercises. As of September 30, 2010, we repurchased a total
of 9,864,905 shares at an average price of $25.24 for a
cost of $249 million under our current authorization and
had $300 million remaining availability in our program.
During the period October 1, 2010 through October 27,
2010, we repurchased an additional 905,522 shares at an average
price of $28.81 for a cost of $26 million and repurchase
capacity increased $2 million from proceeds received from
stock option exercises. We currently have $276 million
remaining availability in our program. The amount and timing of
specific repurchases are subject to market conditions,
applicable legal requirements and other factors. Repurchases may
be conducted in the open market or in privately negotiated
transactions.
Contingent
Tax Liabilities
On July 15, 2010, Cendant and the IRS agreed to settle the
IRS examination of Cendants taxable years 2003 through
2006. During such period, we and Realogy were included in
Cendants tax returns. The agreement with the IRS closes
the IRS examination for tax periods prior to the date of
Separation, July 31, 2006. During September 2010, we
received $10 million in payment from Realogy and paid
$155 million for all such tax liabilities, including the
final interest payable, to Cendant who is the taxpayer. We made
such payment from cash flow generated through operations and the
use of available capacity under our $950 million revolving
credit facility.
As a result of the agreement with the IRS, we (i) reversed
$190 million in net deferred tax liabilities allocated from
Cendant on the Separation Date with a corresponding increase to
stockholders equity and (ii) recognized a
$55 million gain ($42 million, net of tax) with a
corresponding decrease to general and administrative expenses
during the third quarter of 2010. As of September 30, 2010,
our accrual for outstanding Cendant contingent tax liabilities
was $78 million, which relates to legacy state and foreign
tax issues that are expected to be resolved in the next few
years.
48
FINANCIAL
OBLIGATIONS
Our indebtedness consisted of:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Securitized vacation ownership debt:
(a)
|
|
|
|
|
|
|
|
|
Term notes
|
|
$
|
1,400
|
|
|
$
|
1,112
|
|
Bank conduit facility
(b)
|
|
|
215
|
|
|
|
395
|
|
|
|
|
|
|
|
|
|
|
Total securitized vacation ownership debt
|
|
$
|
1,615
|
|
|
$
|
1,507
|
|
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
6.00% senior unsecured notes (due December 2016)
(c)
|
|
$
|
798
|
|
|
$
|
797
|
|
Term loan
(d)
|
|
|
|
|
|
|
300
|
|
Revolving credit facility (due October 2013)
(e)
|
|
|
26
|
|
|
|
|
|
9.875% senior unsecured notes (due May 2014)
(f)
|
|
|
240
|
|
|
|
238
|
|
3.50% convertible notes (due May 2012)
(g)
|
|
|
289
|
|
|
|
367
|
|
7.375% senior unsecured notes (due March 2020)
(h)
|
|
|
247
|
|
|
|
|
|
5.75% senior unsecured notes (due February 2018)
(i)
|
|
|
247
|
|
|
|
|
|
Vacation ownership bank borrowings
(j)
|
|
|
|
|
|
|
153
|
|
Vacation rentals capital leases
(k)
|
|
|
120
|
|
|
|
133
|
|
Other
|
|
|
34
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
2,001
|
|
|
$
|
2,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents debt that is securitized
through bankruptcy-remote special purpose entities
(SPEs), the creditors of which have no recourse to
us for principal and interest.
|
|
(b) |
|
Represents a
364-day,
$600 million, non-recourse vacation ownership bank conduit
facility, with a term through October 2010, whose capacity is
subject to our ability to provide additional assets to
collateralize the facility. As of September 30, 2010, the
total available capacity of the facility was $385 million.
On October 1, 2010, we renewed this facility with a term
through September 2011 and total capacity of $600 million.
|
|
(c) |
|
The balance as of
September 30, 2010 represents $800 million aggregate
principal less $2 million of unamortized discount.
|
|
(d) |
|
The term loan facility was fully
repaid during March 2010.
|
|
(e) |
|
The revolving credit facility has a
total capacity of $950 million, which includes availability
for letters of credit. As of September 30, 2010, we had
$28 million of letters of credit outstanding and, as such,
the total available capacity of the revolving credit facility
was $896 million.
|
|
(f) |
|
Represents senior unsecured notes
we issued during May 2009. The balance as of September 30,
2010 represents $250 million aggregate principal less
$10 million of unamortized discount.
|
|
(g) |
|
Represents convertible notes issued
by us during May 2009, which includes debt principal, less
unamortized discount, and a liability related to a bifurcated
conversion feature. During the third quarter of 2010, we
repurchased a portion of our 3.50% convertible notes (see
Note 7Long-term Debt and Borrowing Arrangements for
further details). The following table details the components of
the convertible notes:
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Debt principal
|
|
$
|
138
|
|
|
$
|
230
|
|
Unamortized discount
|
|
|
(17
|
)
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
Debt less discount
|
|
|
121
|
|
|
|
191
|
|
Fair value of bifurcated conversion feature(*)
|
|
|
168
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
Convertible notes
|
|
$
|
289
|
|
|
$
|
367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
We also have an asset with a fair value equal to the bifurcated
conversion feature, which represents cash-settled call options
that we purchased concurrent with the issuance of the
convertible notes.
|
|
|
|
(h) |
|
Represents senior unsecured notes
we issued during February 2010. The balance as of
September 30, 2010 represents $250 million aggregate
principal less $3 million of unamortized discount.
|
|
(i) |
|
Represents senior unsecured notes
we issued during September 2010. The balance as of
September 30, 2010 represents $250 million aggregate
principal less $3 million of unamortized discount.
|
|
(j) |
|
Represents a
364-day, AUD
213 million, secured, revolving foreign credit facility,
which was paid down and terminated during March 2010.
|
|
(k) |
|
Represents capital lease
obligations with corresponding assets classified within property
and equipment on our Consolidated Balance Sheets.
|
2010
Debt Issuances
During the nine months ended September 30, 2010, we issued
senior unsecured notes, closed three term securitizations and a
new revolving credit facility and repurchased a portion of our
3.50% convertible notes. For further detailed information about
such debt, see Note 7Long-term Debt and Borrowing
Arrangements.
49
Capacity
As of September 30, 2010, available capacity under our
borrowing arrangements was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Outstanding
|
|
|
Available
|
|
|
|
Capacity
|
|
|
Borrowings
|
|
|
Capacity
|
|
|
Securitized vacation ownership debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
Term notes
|
|
$
|
1,400
|
|
|
$
|
1,400
|
|
|
$
|
|
|
Bank conduit facility
(a)
|
|
|
600
|
|
|
|
215
|
|
|
|
385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitized vacation ownership debt
(b)
|
|
$
|
2,000
|
|
|
$
|
1,615
|
|
|
$
|
385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
6.00% senior unsecured notes (due December 2016)
|
|
$
|
798
|
|
|
$
|
798
|
|
|
$
|
|
|
Revolving credit facility (due October 2013)
(c)
|
|
|
950
|
|
|
|
26
|
|
|
|
924
|
|
9.875% senior unsecured notes (due May 2014)
|
|
|
240
|
|
|
|
240
|
|
|
|
|
|
3.50% convertible notes (due May 2012)
|
|
|
289
|
|
|
|
289
|
|
|
|
|
|
7.375% senior unsecured notes (due March 2020)
|
|
|
247
|
|
|
|
247
|
|
|
|
|
|
5.75% senior unsecured notes (due February 2018)
|
|
|
247
|
|
|
|
247
|
|
|
|
|
|
Vacation rentals capital leases
|
|
|
120
|
|
|
|
120
|
|
|
|
|
|
Other
|
|
|
56
|
|
|
|
34
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
2,947
|
|
|
$
|
2,001
|
|
|
|
946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Issuance of letters of credit
(c)
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The capacity of this facility is
subject to our ability to provide additional assets to
collateralize additional securitized borrowings.
|
|
(b) |
|
These outstanding borrowings are
collateralized by $2,874 million of underlying gross
vacation ownership contract receivables and related assets.
|
|
(c) |
|
The capacity under our revolving
credit facility includes availability for letters of credit. As
of September 30, 2010, the available capacity of
$924 million was further reduced by $28 million for
the issuance of letters of credit.
|
Vacation
Ownership Contract Receivables and Securitizations
We pool qualifying vacation ownership contract receivables and
sell them to bankruptcy-remote entities. Vacation ownership
contract receivables qualify for securitization based primarily
on the credit strength of the VOI purchaser to whom financing
has been extended. Vacation ownership contract receivables are
securitized through bankruptcy-remote SPEs that are consolidated
within our Consolidated Financial Statements. As a result, we do
not recognize gains or losses resulting from these
securitizations at the time of sale to the SPEs. Income is
recognized when earned over the contractual life of the vacation
ownership contract receivables. We service the securitized
vacation ownership contract receivables pursuant to servicing
agreements negotiated on an arms-length basis based on market
conditions. The activities of these SPEs are limited to
(i) purchasing vacation ownership contract receivables from
our vacation ownership subsidiaries; (ii) issuing debt
securities
and/or
borrowing under a conduit facility to fund such purchases; and
(iii) entering into derivatives to hedge interest rate
exposure. The bankruptcy-remote SPEs are legally separate from
us. The receivables held by the bankruptcy-remote SPEs are not
available to our creditors and legally are not our assets.
The assets and liabilities of these vacation ownership SPEs are
as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Securitized contract receivables, gross
|
|
$
|
2,709
|
|
|
$
|
2,591
|
|
Securitized restricted cash
|
|
|
140
|
|
|
|
133
|
|
Interest receivables on securitized contract receivables
|
|
|
22
|
|
|
|
20
|
|
Other assets
(a)
|
|
|
3
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
Total SPE assets
(b)
|
|
|
2,874
|
|
|
|
2,755
|
|
|
|
|
|
|
|
|
|
|
Securitized term notes
|
|
|
1,400
|
|
|
|
1,112
|
|
Securitized conduit facilities
|
|
|
215
|
|
|
|
395
|
|
Other liabilities
(c)
|
|
|
25
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
Total SPE liabilities
|
|
|
1,640
|
|
|
|
1,533
|
|
|
|
|
|
|
|
|
|
|
SPE assets in excess of SPE liabilities
|
|
$
|
1,234
|
|
|
$
|
1,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Primarily includes interest rate
derivative contracts and related assets.
|
|
(b) |
|
Excludes deferred financing costs
of $17 million and $20 million as of
September 30, 2010 and December 31, 2009,
respectively, related to securitized debt.
|
|
(c) |
|
Primarily includes interest rate
derivative contracts and accrued interest on securitized debt.
|
50
In addition, we have vacation ownership contract receivables
that have not been securitized through bankruptcy-remote SPEs.
Such gross receivables were $667 million and
$860 million as of September 30, 2010 and
December 31, 2009, respectively. A summary of such
receivables and total vacation ownership SPE assets in excess of
SPE liabilities and net of the allowance for loan losses, is as
follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
SPE assets in excess of SPE liabilities
|
|
$
|
1,234
|
|
|
$
|
1,222
|
|
Non-securitized contract receivables
|
|
|
667
|
|
|
|
598
|
|
Secured contract receivables
(*)
|
|
|
|
|
|
|
262
|
|
Allowance for loan losses
|
|
|
(364
|
)
|
|
|
(370
|
)
|
|
|
|
|
|
|
|
|
|
Total, net
|
|
$
|
1,537
|
|
|
$
|
1,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) |
|
As of December 31, 2009, such
receivables collateralized our secured, revolving foreign credit
facility, which was paid down and terminated during March 2010.
|
Covenants
The revolving credit facility is subject to covenants including
the maintenance of specific financial ratios. The financial
ratio covenants consist of a minimum consolidated interest
coverage ratio of at least 3.0 to 1.0 as of the measurement date
and a maximum consolidated leverage ratio not to exceed 3.75 to
1.0 on the measurement date. The consolidated interest coverage
ratio is calculated by dividing Consolidated EBITDA (as defined
in the credit agreement) by Consolidated Interest Expense (as
defined in the credit agreement), both as measured on a trailing
12 month basis preceding the measurement date. As of
September 30, 2010, our consolidated interest coverage
ratio was 7.7 times. Consolidated Interest Expense excludes,
among other things, interest expense on any Securitization
Indebtedness (as defined in the credit agreement). The
consolidated leverage ratio is calculated by dividing
Consolidated Total Indebtedness (as defined in the credit
agreement and which excludes, among other things, Securitization
Indebtedness) as of the measurement date by Consolidated EBITDA
as measured on a trailing 12 month basis preceding the
measurement date. As of September 30, 2010, our
consolidated leverage ratio was 1.9 times. Covenants in this
credit facility also include limitations on indebtedness of
material subsidiaries; liens; mergers, consolidations,
liquidations and dissolutions; sale of all or substantially all
assets; and sale and leaseback transactions. Events of default
in this credit facility include failure to pay interest,
principal and fees when due; breach of a covenant or warranty;
acceleration of or failure to pay other debt in excess of
$50 million (excluding Securitization Indebtedness);
insolvency matters; and a change of control.
The 6.00% senior unsecured notes, 9.875% senior
unsecured notes, 7.375% senior unsecured notes and
5.75% senior unsecured notes contain various covenants
including limitations on liens, limitations on potential sale
and leaseback transactions and change of control restrictions.
In addition, there are limitations on mergers, consolidations
and potential sale of all or substantially all of our assets.
Events of default in the notes include failure to pay interest
and principal when due, breach of a covenant or warranty,
acceleration of other debt in excess of $50 million and
insolvency matters. The convertible notes do not contain
affirmative or negative covenants, however, the limitations on
mergers, consolidations and potential sale of all or
substantially all of our assets and the events of default for
our senior unsecured notes are applicable to such notes. Holders
of the convertible notes have the right to require us to
repurchase the convertible notes at 100% of principal plus
accrued and unpaid interest in the event of a fundamental
change, defined to include, among other things, a change of
control, certain recapitalizations and if our common stock is no
longer listed on a national securities exchange.
As of September 30, 2010, we were in compliance with all of
the covenants described above.
Each of our non-recourse, securitized term notes and the bank
conduit facility contain various triggers relating to the
performance of the applicable loan pools. If the vacation
ownership contract receivables pool that collateralizes one of
our securitization notes fails to perform within the parameters
established by the contractual triggers (such as higher default
or delinquency rates), there are provisions pursuant to which
the cash flows for that pool will be maintained in the
securitization as extra collateral for the note holders or
applied to accelerate the repayment of outstanding principal to
the noteholders. As of September 30, 2010, all of our
securitized loan pools were in compliance with applicable
contractual triggers.
LIQUIDITY
RISK
Our vacation ownership business finances certain of its
receivables through (i) an asset-backed bank conduit
facility and (ii) periodically accessing the capital
markets by issuing asset-backed securities. None of the
currently outstanding asset-backed securities contains any
recourse provisions to us other than interest rate risk related
to swap counterparties (solely to the extent that the amount
outstanding on our notes differs from the forecasted
amortization schedule at the time of issuance).
51
We believe that our bank conduit facility, with a term through
September 2011 and capacity of $600 million, combined with
our ability to issue term asset-backed securities, should
provide sufficient liquidity for our expected sales pace and we
expect to have available liquidity to finance the sale of VOIs.
We also believe that we will be able to renew our bank conduit
facility at or before the maturity date.
Our $950 million revolving credit agreement, which expires
in October 2013, contains a provision that is a condition of an
extension of credit. The provision, which was standard market
practice for issuers of our rating and industry at the time of
our revolver renewal, allows the lenders to withhold an
extension of credit if the representations and warranties we
made at the time we executed the revolving credit facility
agreement are not true and correct in all material respects
including if a development or event has or would reasonably be
expected to have a material adverse effect on our business,
assets, operations or condition, financial or otherwise. The
application of the material adverse effect provision contains
exclusions for the impact resulting from disruptions in, or the
inability of companies engaged in businesses similar to those
engaged in by us and our subsidiaries to consummate financings
in, the asset backed securities or conduit market.
Some of our vacation ownership developments are supported by
surety bonds provided by affiliates of certain insurance
companies in order to meet regulatory requirements of certain
states. In the ordinary course of our business, we have
assembled commitments from thirteen surety providers in the
amount of $1.2 billion, of which we had $353 million
outstanding as of September 30, 2010. The availability,
terms and conditions, and pricing of such bonding capacity is
dependent on, among other things, continued financial strength
and stability of the insurance company affiliates providing such
bonding capacity, the general availability of such capacity and
our corporate credit rating. If such bonding capacity is
unavailable or, alternatively, if the terms and conditions and
pricing of such bonding capacity are unacceptable to us, the
cost of development of our vacation ownership units could be
negatively impacted.
Our liquidity position may also be negatively affected by
unfavorable conditions in the capital markets in which we
operate or if our vacation ownership contract receivables
portfolios do not meet specified portfolio credit parameters.
Our liquidity as it relates to our vacation ownership contract
receivables securitization program could be adversely affected
if we were to fail to renew or replace our conduit facility on
its annual expiration date or if a particular receivables pool
were to fail to meet certain ratios, which could occur in
certain instances if the default rates or other credit metrics
of the underlying vacation ownership contract receivables
deteriorate. Our ability to sell securities backed by our
vacation ownership contract receivables depends on the continued
ability and willingness of capital market participants to invest
in such securities.
As of September 30, 2010, we had $385 million of
availability under our asset-backed bank conduit facility. Any
disruption to the asset-backed or commercial paper markets could
adversely impact our ability to obtain such financings.
Our senior unsecured debt is rated BBB- by Standard and
Poors (S&P). During February 2010,
S&P assigned a stable outlook to our senior
unsecured debt. During February 2010, Moodys Investors
Service upgraded our senior unsecured debt rating to Ba1 and
during September 2010, assigned a positive outlook.
A security rating is not a recommendation to buy, sell or hold
securities and is subject to revision or withdrawal by the
assigning rating organization. Reference in this report to any
such credit rating is intended for the limited purpose of
discussing or referring to aspects of our liquidity and of our
costs of funds. Any reference to a credit rating is not intended
to be any guarantee or assurance of, nor should there be any
undue reliance upon, any credit rating or change in credit
rating, nor is any such reference intended as any inference
concerning future performance, future liquidity or any future
credit rating.
As a result of the sale of Realogy on April 10, 2007,
Realogys senior debt credit rating was downgraded to below
investment grade. Under the Separation Agreement, if Realogy
experienced such a change of control and suffered such a ratings
downgrade, it was required to post a letter of credit in an
amount acceptable to us and Avis Budget Group to satisfy the
fair value of Realogys indemnification obligations for the
Cendant legacy contingent liabilities in the event Realogy could
not otherwise satisfy such obligations to the extent they became
due. On April 26, 2007, Realogy posted a $500 million
irrevocable standby letter of credit from a major commercial
bank in favor of Avis Budget Group and upon which demand may be
made if Realogy does not otherwise satisfy its obligations for
its share of the Cendant legacy contingent liabilities. The
letter of credit can be adjusted from time to time based upon
the outstanding contingent liabilities and has an expiration
date of September 2013, subject to renewal and certain
provisions. As such, the letter of credit has been reduced three
times, most recently to $133 million during September 2010.
The issuance of this letter of credit does not relieve or limit
Realogys obligations for these liabilities.
SEASONALITY
We experience seasonal fluctuations in our net revenues and net
income from our franchise and management fees, commission income
earned from renting vacation properties, annual subscription
fees or annual membership dues, as applicable, and exchange and
member-related transaction fees and sales of VOIs. Revenues from
franchise and management fees are generally higher in the second
and third quarters than in the first or fourth quarters, because
of increased leisure travel during the summer months. Revenues
from rental income earned from vacation rentals are generally
highest in the
52
third quarter, when vacation rentals are highest. Revenues from
vacation exchange and member-related transaction fees are
generally highest in the first quarter, which is generally when
members of our vacation exchange business plan and book their
vacations for the year. Revenues from sales of VOIs are
generally higher in the second and third quarters than in other
quarters. The seasonality of our business may cause fluctuations
in our quarterly operating results. As we expand into new
markets and geographical locations, we may experience increased
or different seasonality dynamics that create fluctuations in
operating results different from the fluctuations we have
experienced in the past.
SEPARATION
ADJUSTMENTS AND TRANSACTIONS WITH FORMER PARENT AND
SUBSIDIARIES
Transfer
of Cendant Corporate Liabilities and Issuance of Guarantees to
Cendant and Affiliates
Pursuant to the Separation Agreement, upon the distribution of
our common stock to Cendant shareholders, we entered into
certain guarantee commitments with Cendant (pursuant to the
assumption of certain liabilities and the obligation to
indemnify Cendant, Realogy and Travelport for such liabilities)
and guarantee commitments related to deferred compensation
arrangements with each of Cendant and Realogy. These guarantee
arrangements primarily relate to certain contingent litigation
liabilities, contingent tax liabilities, and Cendant contingent
and other corporate liabilities, of which we assumed and are
responsible for 37.5%, while Realogy is responsible for the
remaining 62.5%. The remaining balance of liabilities assumed in
connection with the Separation was $104 million and
$310 million as of September 30, 2010 and
December 31, 2009, respectively. These amounts were
comprised of certain Cendant corporate liabilities which were
recorded on the books of Cendant as well as additional
liabilities which were established for guarantees issued at the
Separation Date, related to certain unresolved contingent
matters and certain others that could arise during the guarantee
period. Regarding the guarantees, if any of the companies
responsible for all or a portion of such liabilities were to
default in its payment of costs or expenses related to any such
liability, we would be responsible for a portion of the
defaulting party or parties obligation. We also provided a
default guarantee related to certain deferred compensation
arrangements related to certain current and former senior
officers and directors of Cendant, Realogy and Travelport. These
arrangements, which are discussed in more detail below, have
been valued upon the Separation in accordance with the guidance
for guarantees and recorded as liabilities on the Consolidated
Balance Sheets. To the extent such recorded liabilities are not
adequate to cover the ultimate payment amounts, such excess will
be reflected as an expense to the results of operations in
future periods.
As of September 30, 2010, the $104 million of
Separation related liabilities is comprised of $5 million
for litigation matters, $78 million for tax liabilities,
$16 million for liabilities of previously sold businesses
of Cendant, $4 million for other contingent and corporate
liabilities and $1 million of liabilities where the
calculated guarantee amount exceeded the contingent liability
assumed at the Separation Date. In connection with these
liabilities, $64 million is recorded in current due to
former Parent and subsidiaries and $39 million is recorded
in long-term due to former Parent and subsidiaries as of
September 30, 2010 on the Consolidated Balance Sheet. We
will indemnify Cendant for these contingent liabilities and
therefore any payments made to the third party would be through
the former Parent. The $1 million relating to guarantees is
recorded in other current liabilities as of September 30,
2010 on the Consolidated Balance Sheet. The actual timing of
payments relating to these liabilities is dependent on a variety
of factors beyond our control. See Contractual Obligations for
the estimated timing of such payments. In addition, as of
September 30, 2010, we had $10 million of receivables
due from former Parent and subsidiaries primarily relating to
income taxes, which is recorded in other current assets on the
Consolidated Balance Sheet. Such receivables totaled
$5 million as of December 31, 2009.
Following is a discussion of the liabilities on which we issued
guarantees:
|
|
|
|
·
|
Contingent litigation liabilities We assumed 37.5% of
liabilities for certain litigation relating to, arising out of
or resulting from certain lawsuits in which Cendant is named as
the defendant. The indemnification obligation will continue
until the underlying lawsuits are resolved. We will indemnify
Cendant to the extent that Cendant is required to make payments
related to any of the underlying lawsuits. As the
indemnification obligation relates to matters in various stages
of litigation, the maximum exposure cannot be quantified. Due to
the inherently uncertain nature of the litigation process, the
timing of payments related to these liabilities cannot
reasonably be predicted, but is expected to occur over several
years. Since the Separation, Cendant settled a majority of these
lawsuits and we assumed a portion of the related indemnification
obligations. For each settlement, we paid 37.5% of the aggregate
settlement amount to Cendant. Our payment obligations under the
settlements were greater or less than our accruals, depending on
the matter. As a result of settlements and payments to Cendant,
as well as other reductions and accruals for developments in
active litigation matters, our aggregate accrual for outstanding
Cendant contingent litigation liabilities was $5 million as
of September 30, 2010.
|
|
|
·
|
Contingent tax liabilities Prior to the Separation, we
and Realogy were included in the consolidated federal and state
income tax returns of Cendant through the Separation date for
the 2006 period then ended. We are generally liable for 37.5% of
certain contingent tax liabilities. In addition, each of us,
Cendant and Realogy
|
53
|
|
|
|
|
may be responsible for 100% of certain of Cendants tax
liabilities that will provide the responsible party with a
future, offsetting tax benefit.
|
On July 15, 2010, Cendant and the IRS agreed to settle the
IRS examination of Cendants taxable years 2003 through
2006. The agreements with the IRS close the IRS examination for
tax periods prior to the Separation Date. The agreements with
the IRS also include a resolution with respect to the tax
treatment of our timeshare receivables, which resulted in the
acceleration of our unrecognized deferred tax liabilities as of
the Separation Date. In connection with reaching agreement with
the IRS to resolve the contingent federal tax liabilities at
issue, we entered into an agreement with Realogy to clarify each
partys obligations under the tax sharing agreement. Under
the agreement with Realogy, among other things, the parties
specified that we have sole responsibility for taxes and
interest associated with the acceleration of timeshare
receivables income previously deferred for tax purposes, while
Realogy will not seek any reimbursement for the loss of a step
up in basis of certain assets.
During September 2010, we received $10 million in payment
from Realogy and paid $155 million for all such tax
liabilities, including the final interest payable, to Cendant
who is the taxpayer. The agreement with the IRS and the net
payment of $145 million resulted in (i) the reversal
of $190 million in net deferred tax liabilities allocated
from Cendant on the Separation Date with a corresponding
increase to stockholders equity during the third quarter
of 2010; and (ii) the recognition of a $55 million
gain ($42 million, net of tax) with a corresponding