WYN-2012.6.30-10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q


þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012


¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 001-32876

Wyndham Worldwide Corporation

(Exact name of registrant as specified in its charter)



Delaware		20-0052541
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

22 Sylvan Way		07054
Parsippany, New Jersey		(Zip Code)
(Address of principal executive offices)

(973) 753-6000

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	þ	Accelerated filer	¨	Non-accelerated filer	¨	Smaller reporting company	¨
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

The number of shares outstanding of the issuer’s common stock was 142,187,723 shares as of June 30, 2012.

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		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	1
	Report of Independent Registered Public Accounting Firm	1
	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2012 and 2011	2
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2012 and 2011	3
	Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011	4
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011	5
	Consolidated Statements of Equity for the Six Months ended June 30, 2012 and 2011	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
	Forward-Looking Statements	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risks	38
Item 4.	Controls and Procedures	38
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 1B.	Unresolved Staff Comments	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3.	Defaults Upon Senior Securities	45
Item 4.	Mine Safety Disclosure	45
Item 5.	Other Information	45
Item 6.	Exhibits	45
	Signatures	46

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PART I — FINANCIAL 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 June 30, 2012, the related consolidated statements of income and comprehensive income for the three-month and six-month periods ended June 30, 2012 and 2011 and the related consolidated statements of cash flows and equity for the six-month periods ended June 30, 2012 and 2011. These interim consolidated financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2011, and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for the year then ended (not presented herein); and in our report dated February 17, 2012, 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, 2011 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Deloitte & Touche LLP

Parsippany, New Jersey

July 25, 2012

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WYNDHAM WORLDWIDE CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(In millions, except per share amounts)

(Unaudited)



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Net revenues
Service and membership fees	$	489		$	499		$	993		$	995
Vacation ownership interest sales	342			313			613			535
Franchise fees	163			134			281			235
Consumer financing	102			103			205			206
Other	43			41			83			70
Net revenues	1,139			1,090			2,175			2,041
Expenses
Operating	451			458			895			868
Cost of vacation ownership interests	42			48			70			79
Consumer financing interest	23			23			46			46
Marketing and reservation	190			153			356			290
General and administrative	156			126			310			266
Asset impairment	—			—			—			13
Restructuring	—			7			—			6
Depreciation and amortization	46			45			91			90
Total expenses	908			860			1,768			1,658
Operating income	231			230			407			383
Other income, net	(5		)	(1		)	(9		)	(7		)
Interest expense	32			36			65			69
Early extinguishment of debt	—			1			106			12
Interest income	(2		)	(2		)	(5		)	(3		)
Income before income taxes	206			196			250			312
Provision for income taxes	78			82			91			126
Net income	128			114			159			186
Net loss attributable to noncontrolling interest	—			—			1			—
Net income attributable to Wyndham	$	128		$	114		$	160		$	186
Earnings per share
Basic	$	0.89		$	0.68		$	1.10		$	1.10
Diluted	0.88			0.67			1.08			1.07

Cash dividends declared per share	$	0.23		$	0.15		$	0.46		$	0.30

See Notes to Consolidated Financial Statements.

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WYNDHAM WORLDWIDE CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)



	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2012			2011		2012			2011
Net income	$	128		$	114	$	159		$	186
Net loss attributable to noncontrolling interest	—			—		1			—
Net income attributable to Wyndham	128			114		160			186
Other comprehensive income, net of tax
Foreign currency translation adjustments	(45		)	12		(7		)	28
Unrealized gain on cash flow hedges	1			—		3			2
Other comprehensive income, net of tax	(44		)	12		(4		)	30
Comprehensive income attributable to Wyndham	$	84		$	126	$	156		$	216

See Notes to Consolidated Financial Statements.

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WYNDHAM WORLDWIDE CORPORATION

CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

(Unaudited)



	June 30, 2012			December 31, 2011
Assets
Current assets:
Cash and cash equivalents	$	286		$	142
Trade receivables, net	393			409
Vacation ownership contract receivables, net	295			297
Inventory	363			351
Prepaid expenses	116			121
Deferred income taxes	176			153
Other current assets	306			257
Total current assets	1,935			1,730
Long-term vacation ownership contract receivables, net	2,486			2,551
Non-current inventory	723			759
Property and equipment, net	1,121			1,117
Goodwill	1,478			1,479
Trademarks, net	730			730
Franchise agreements and other intangibles, net	386			401
Other non-current assets	255			256
Total assets	$	9,114		$	9,023
Liabilities and Equity
Current liabilities:
Securitized vacation ownership debt	$	191		$	196
Current portion of long-term debt	11			46
Accounts payable	416			278
Deferred income	452			402
Due to former Parent and subsidiaries	12			10
Accrued expenses and other current liabilities	620			631
Total current liabilities	1,702			1,563
Long-term securitized vacation ownership debt	1,663			1,666
Long-term debt	2,255			2,107
Deferred income taxes	1,112			1,065
Deferred income	185			182
Due to former Parent and subsidiaries	29			37
Other non-current liabilities	172			171
Total liabilities	7,118			6,791
Commitments and contingencies (Note 10)
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 214,486,204 shares in 2012 and 212,286,217 shares in 2011	2			2
Treasury stock, at cost – 72,644,550 shares in 2012 and 65,228,133 shares in 2011	(2,349		)	(2,009		)
Additional paid-in capital	3,836			3,818
Retained earnings	384			293
Accumulated other comprehensive income	124			128
Total stockholders’ equity	1,997			2,232
Noncontrolling interest	(1		)	—
Total equity	1,996			2,232
Total liabilities and equity	$	9,114		$	9,023

See Notes to Consolidated Financial Statements.

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WYNDHAM WORLDWIDE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)



	Six Months Ended
	June 30,
	2012			2011
Operating Activities
Net income	$	159		$	186
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	91			90
Provision for loan losses	196			159
Deferred income taxes	22			52
Stock-based compensation	20			21
Excess tax benefits from stock-based compensation	(26		)	(17		)
Asset impairment	—			13
Loss on early extinguishment of debt	105			12
Non-cash interest	12			15
Net change in assets and liabilities, excluding the impact of acquisitions and dispositions:
Trade receivables	13			53
Vacation ownership contract receivables	(133		)	(63		)
Inventory	41			59
Prepaid expenses	6			(13		)
Other current assets	(42		)	4
Accounts payable, accrued expenses and other current liabilities	132			97
Due to former Parent and subsidiaries, net	(2		)	(15		)
Deferred income	55			64
Other, net	(2		)	(21		)
Net cash provided by operating activities	647			696
Investing Activities
Property and equipment additions	(78		)	(96		)
Equity investments and development advances	(2		)	(5		)
Proceeds from asset sales	—			18
Decrease in securitization restricted cash	7			9
Increase in escrow deposit restricted cash	(20		)	(18		)
Other, net	(3		)	(12		)
Net cash used in investing activities	(96		)	(104		)
Financing Activities
Proceeds from securitized borrowings	768			770
Principal payments on securitized borrowings	(775		)	(733		)
Proceeds from long-term debt	1,074			1,002
Principal payments on long-term debt	(1,221		)	(1,087		)
Proceeds from note issuances	941			245
Repurchase of notes	(755		)	—
Repayment/repurchase of convertible notes	(45		)	(262		)
Proceeds from call options	33			155
Repurchase of warrants	—			(112		)
Dividends to shareholders	(70		)	(53		)
Repurchase of common stock	(342		)	(370		)
Proceeds from stock option exercises	13			10
Excess tax benefits from stock-based compensation	26			17
Debt issuance costs	(8		)	(10		)
Net share settlement of incentive equity awards	(42		)	(29		)
Other, net	(1		)	—
Net cash used in financing activities	(404		)	(457		)
Effect of changes in exchange rates on cash and cash equivalents	(3		)	5
Net increase in cash and cash equivalents	144			140
Cash and cash equivalents, beginning of period	142			156
Cash and cash equivalents, end of period	$	286		$	296

See Notes to Consolidated Financial Statements.

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WYNDHAM WORLDWIDE CORPORATION

CONSOLIDATED STATEMENTS OF EQUITY

(In millions)

(Unaudited)



	Common Shares Outstanding		Common Stock		Treasury Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income			Non-controlling Interest			Total Equity
Balance as of December 31, 2011	147		$	2	$	(2,009	)	$	3,818		$	293		$	128		$	—		$	2,232
Net income	—		—		—			—			160			—			(1		)	159
Other comprehensive income	—		—		—			—			—			(4		)	—			(4		)
Exercise of stock options	—		—		—			13			—			—			—			13
Issuance of shares for RSU vesting	2		—		—			—			—			—			—			—
Net share settlement of incentive equity awards	—		—		—			(42		)	—			—			—			(42		)
Change in deferred compensation	—		—		—			20			—			—			—			20
Repurchase of common stock	(7	)	—		(340		)	—			—			—			—			(340		)
Change in excess tax benefit on equity awards	—		—		—			25			—			—			—			25
Dividends	—		—		—			—			(69		)	—			—			(69		)
Other	—		—		—			2			—			—			—			2
Balance as of June 30, 2012	142		$	2	$	(2,349	)	$	3,836		$	384		$	124		$	(1	)	$	1,996



	Common Shares Outstanding		Common Stock		Treasury Stock			Additional Paid-in Capital			Retained Earnings/ (Accumulated Deficit)			Accumulated Other Comprehensive Income		Non-controlling Interest		Total Equity
Balance as of December 31, 2010	173		$	2	$	(1,107	)	$	3,892		$	(25	)	$	155	$	—	$	2,917
Net income	—		—		—			—			186			—		—		186
Other comprehensive income	—		—		—			—			—			30		—		30
Exercise of stock options	—		—		—			10			—			—		—		10
Issuance of shares for RSU vesting	2		—		—			—			—			—		—		—
Net share settlement of incentive equity awards	—		—		—			(29		)	—			—		—		(29		)
Change in deferred compensation	—		—		—			21			—			—		—		21
Repurchase of warrants	—		—		—			(112		)	—			—		—		(112		)
Repurchase of common stock	(11	)	—		(373		)	—			—			—		—		(373		)
Change in excess tax benefit on equity awards	—		—		—			17			—			—		—		17
Dividends	—		—		—			—			(52		)	—		—		(52		)
Other	—		—		—			(1		)	—			—		—		(1		)
Balance as of June 30, 2011	164		$	2	$	(1,480	)	$	3,798		$	109		$	185	$	—	$	2,614

See Notes to Consolidated Financial Statements.

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WYNDHAM WORLDWIDE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unless otherwise noted, all amounts are in millions, except share and per share amounts)

(Unaudited)

1. Basis of Presentation

Wyndham Worldwide Corporation (“Wyndham” or the “Company”) is a global provider of hospitality services and products. The accompanying Consolidated Financial Statements include the accounts and transactions of Wyndham, as well as the entities in which Wyndham directly or indirectly has a controlling financial interest. The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America. All intercompany balances and transactions have been eliminated in the Consolidated Financial Statements.

In presenting the Consolidated Financial Statements, management makes estimates and assumptions that affect the amounts reported and related disclosures. Estimates, by their nature, are based on judgment and available information. Accordingly, actual results could differ from those estimates. In management’s opinion, the Consolidated Financial Statements contain all normal recurring adjustments necessary for a fair presentation of interim results reported. The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire year or any subsequent interim period. These financial statements should be read in conjunction with the Company’s 2011 Consolidated Financial Statements included in its Annual Report filed on Form 10-K with the Securities and Exchange Commission (“SEC”) on February 17, 2012.

Business Description

The Company operates in the following business segments:


•	Lodging—franchises hotels in the upper upscale, upscale, upper midscale, midscale, economy and extended stay segments of the lodging industry and provides hotel management services for full-service hotels.


•	Vacation Exchange and Rentals—provides vacation exchange services and products to owners of intervals of vacation ownership interests (“VOIs”) and markets vacation rental properties primarily on behalf of independent owners.


•	Vacation Ownership—develops, markets and sells VOIs to individual consumers, provides consumer financing in connection with the sale of VOIs and provides property management services at resorts.

Recently Issued Accounting Pronouncements

Fair Value Measurement. In May 2011, the Financial Accounting Standards Board (“FASB”) issued guidance which generally provides a consistent definition of fair value and ensures that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. The guidance changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. This guidance is effective for interim and annual reporting periods beginning after December 15, 2011 and shall be applied on a prospective basis. The Company adopted the guidance on January 1, 2012, as required. There was no material impact on the Consolidated Financial Statements resulting from the adoption.

Testing Goodwill for Impairment. In September 2011, the FASB issued guidance on testing goodwill for impairment, which amends existing guidance by giving an entity the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is concluded that the fair value of a reporting unit is, more likely than not, less than its carrying amount, then it would be necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. This guidance is effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company adopted the guidance on January 1, 2012, as required. There was no material impact on the Consolidated Financial Statements resulting from the adoption.

2. Earnings Per Share

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

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The following table sets forth the computation of basic and diluted EPS (in millions, except per share data):



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Net income attributable to Wyndham	$	128		$	114		$	160		$	186
Basic weighted average shares outstanding	144			167			145			170
Stock options, SSARs and RSUs ^(a)	2			3		^(c)	2			3		^(c)
Warrants ^(b)	1			—			1			1
Diluted weighted average shares outstanding	147		^(d)	170		^(e)	148		^(d)	174		^(e)
Earnings per share:
Basic	$	0.89		$	0.68		$	1.10		$	1.10
Diluted	0.88			0.67			1.08			1.07


^(a)	Includes unvested dilutive restricted stock units (“RSUs”) which are subject to future forfeitures.


^(b)	Represents the dilutive effect of warrants to purchase shares of the Company’s common stock related to the May 2009 issuance of the Company’s convertible notes.


^(c)	Excludes 2 million and 3 million stock options and stock-settled stock appreciation rights ("SSARs") for the three months and six months ended June 30, 2011, respectively, as it would have been anti-dilutive to EPS.


^(d)	Excludes 609,000 performance vested restricted stock units ("PSUs"), as the Company has not met the required performance metrics.


^(e)	Excludes 350,000 PSUs, as the Company has not met the required performance metrics.

Dividend Payments

During the quarterly periods ended March 31 and June 30, 2012, the Company paid cash dividends of $0.23 per share ($70 million in the aggregate). During the quarterly periods ended March 31 and June 30, 2011, the Company paid cash dividends of $0.15 per share ($53 million in the aggregate).

Stock Repurchase Program

The following table summarizes stock repurchase activity under the current stock repurchase program:



	Shares	Cost		Average Price
As of December 31, 2011	40.1	$	1,197	$	29.83
For the six months ended June 30, 2012	7.4	340		45.83
As of June 30, 2012	47.5	$	1,537	32.33

The Company had $790 million remaining availability in its program as of June 30, 2012. The total capacity of this program is increased by proceeds received from stock option exercises.

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3. Vacation Ownership Contract Receivables

The Company generates vacation ownership contract receivables by extending financing to the purchasers of its VOIs. Current and long-term vacation ownership contract receivables, net consisted of:



	June 30, 2012		December 31, 2011
Current vacation ownership contract receivables:
Securitized	$	243	$	262
Non-securitized	97		76
	340		338
Less: Allowance for loan losses	45		41
Current vacation ownership contract receivables, net	$	295	$	297
Long-term vacation ownership contract receivables:
Securitized	$	2,104	$	2,223
Non-securitized	770		681
	2,874		2,904
Less: Allowance for loan losses	388		353
Long-term vacation ownership contract receivables, net	$	2,486	$	2,551

During the three and six months ended June 30, 2012, the Company’s securitized vacation ownership contract receivables generated interest income of $78 million and $153 million, respectively. During the three and six months ended June 30, 2011, such amounts were $83 million and $165 million, respectively.

Principal payments that are contractually due on the Company’s vacation ownership contract receivables during the next twelve months are classified as current on the Consolidated Balance Sheets. During the six months ended June 30, 2012 and 2011, the Company originated vacation ownership contract receivables of $518 million and $454 million, respectively, and received principal collections of $385 million and $391 million, respectively. The weighted average interest rate on outstanding vacation ownership contract receivables was 13.4% and 13.3% at June 30, 2012 and December 31, 2011, respectively.

The activity in the allowance for loan losses on vacation ownership contract receivables was as follows:



	Amount
Allowance for loan losses as of December 31, 2011	$	394
Provision for loan losses	196
Contract receivables write-offs, net	(157		)
Allowance for loan losses as of June 30, 2012	$	433



	Amount
Allowance for loan losses as of December 31, 2010	$	362
Provision for loan losses	159
Contract receivables write-offs, net	(159		)
Allowance for loan losses as of June 30, 2011	$	362

In accordance with the guidance for accounting for real estate timesharing transactions, the Company recorded a provision for loan losses of $100 million and $196 million as a reduction of net revenues during the three and six months ended June 30, 2012, respectively, and $80 million and $159 million during the three and six months ended June 30, 2011, respectively.

Credit Quality for Financed Receivables and the Allowance for Credit Losses

The basis of the differentiation within the identified class of financed VOI contract receivable is the consumer’s FICO score. A FICO score is a branded version of a consumer credit score widely used within the U.S. by the largest banks and lending institutions. FICO scores range from 300 – 850 and are calculated based on information obtained from one or

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more of the three major U.S. credit reporting agencies that compile and report on a consumer’s credit history. The Company updates its records for all active VOI contract receivables with a balance due on a rolling monthly basis so as to ensure that all VOI contract receivables are scored at least every six months. The Company groups all VOI contract receivables into five different categories: FICO scores ranging from 700 to 850, 600 to 699, Below 600, No Score (primarily comprised of consumers for whom a score is not readily available, including consumers declining access to FICO scores and non U.S. residents) and Asia Pacific (comprised of receivables in the Company’s Wyndham Vacation Resort Asia Pacific business for which scores are not readily available).

The following table details an aged analysis of financing receivables using the most recently updated FICO scores (based on the update policy described above):



	As of June 30, 2012
	700+		600-699		<600		No Score		Asia Pacific		Total
Current	$	1,384	$	1,004	$	309	$	84	$	303	$	3,084
31 - 60 days	9		19		21		3		4		56
61 - 90 days	9		14		15		2		2		42
91 - 120 days	6		10		14		1		1		32
Total	$	1,408	$	1,047	$	359	$	90	$	310	$	3,214

	As of December 31, 2011
	700+		600-699		<600		No Score		Asia Pacific		Total
Current	$	1,424	$	985	$	320	$	77	$	290	$	3,096
31 - 60 days	15		23		24		3		3		68
61 - 90 days	8		14		15		1		2		40
91 - 120 days	8		11		17		1		1		38
Total	$	1,455	$	1,033	$	376	$	82	$	296	$	3,242

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

4. Inventory

Inventory consisted of:



	June 30, 2012		December 31, 2011
Land held for VOI development	$	137	$	136
VOI construction in process	163		149
Completed inventory and vacation credits ^(a)(b)	786		825
Total inventory	1,086		1,110
Less: Current portion	363		351
Non-current inventory	$	723	$	759


^(a)	Includes estimated recoveries of $180 million and $164 million as of June 30, 2012 and December 31, 2011, respectively. Vacation credits relate to both the Company’s vacation ownership and vacation exchange and rentals businesses.


^(b)	Includes $70 million and $73 million as of June 30, 2012 and December 31, 2011, respectively, related to the Company’s vacation exchange and rentals business.

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

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5. Long-Term Debt and Borrowing Arrangements

The Company’s indebtedness consisted of:



	June 30, 2012		December 31, 2011
Securitized vacation ownership debt: ^(a)
Term notes	$	1,634	$	1,625
Bank conduit facility ^(b)	220		237
Total securitized vacation ownership debt	1,854		1,862
Less: Current portion of securitized vacation ownership debt	191		196
Long-term securitized vacation ownership debt	$	1,663	$	1,666
Long-term debt:
Revolving credit facility (due July 2016) ^(c)	$	81	$	218
3.50% convertible notes (due May 2012)^(d)	—		36
9.875% senior unsecured notes (due May 2014) ^(e)	42		243
6.00% senior unsecured notes (due December 2016) ^(f)	362		811
2.95% senior unsecured notes (due March 2017) ^(g)	298		—
5.75% senior unsecured notes (due February 2018) ^(h)	248		247
7.375% senior unsecured notes (due March 2020) ⁽ⁱ⁾	248		247
5.625% senior unsecured notes (due March 2021) ^(j)	245		245
4.25% senior unsecured notes (due March 2022) ^(k)	644		—
Vacation rentals capital leases ^(l)	95		102
Other	3		4
Total long-term debt	2,266		2,153
Less: Current portion of long-term debt	11		46
Long-term debt	$	2,255	$	2,107

^(a)

Represents non-recourse debt that is securitized through bankruptcy-remote special purpose entities (“SPEs”), the creditors of which have no recourse to the Company for principal and interest. These outstanding borrowings are collateralized by $2,490 million and $2,638 million of underlying gross vacation ownership contract receivables and related assets as of June 30, 2012 and December 31, 2011, respectively.


^(b)	Represents a $600 million, non-recourse vacation ownership bank conduit facility, with a term through June 2013 whose capacity is subject to the Company’s ability to provide additional assets to collateralize the facility. As of June 30, 2012, the total available capacity of the facility was $380 million.


^(c)	Total capacity of the revolving credit facility is $1.0 billion, which includes availability for letters of credit. As of June 30, 2012, the Company had $11 million of letters of credit outstanding and, as such, the total available capacity of the revolving credit facility was $908 million.


^(d)	Represents convertible notes issued by the Company during May 2009 and repaid by the Company during May 2012.


^(e)	Represents senior unsecured notes issued by the Company during May 2009. The balance as of June 30, 2012 represents $43 million aggregate principal less $1 million of unamortized discount.


^(f)	Represents senior unsecured notes issued by the Company during December 2006. The balance as of June 30, 2012 represents $357 million aggregate principal less $1 million of unamortized discount, plus $6 million of unamortized gains from the settlement of a derivative.


^(g)	Represents senior unsecured notes issued by the Company during March 2012. The balance as of June 30, 2012 represents $300 million aggregate principal less $2 million of unamortized discount.


^(h)	Represents senior unsecured notes issued by the Company during September 2010. The balance as of June 30, 2012 represents $250 million aggregate principal less $2 million of unamortized discount.


⁽ⁱ⁾	Represents senior unsecured notes issued by the Company during February 2010. The balance as of June 30, 2012 represents $250 million aggregate principal less $2 million of unamortized discount.


^(j)	Represents senior unsecured notes issued by the Company during March 2011. The balance as of June 30, 2012 represents $250 million aggregate principal less $5 million of unamortized discount.


^(k)	Represents senior unsecured notes issued by the Company during March 2012. The balance as of June 30, 2012 represents $650 million aggregate principal less $6 million of unamortized discount.


^(l)	Represents capital lease obligations with corresponding assets classified within property and equipment on the Consolidated Balance Sheets.

2012 Debt Issuances

2.95% Senior Unsecured Notes. During March 2012, the Company issued senior unsecured notes, with face value of $300 million and bearing interest at a rate of 2.95%, for net proceeds of $298 million. Interest began accruing on March 7, 2012 and is payable semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2012. The

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notes will mature on March 1, 2017 and are redeemable at the Company’s option at any time, in whole or in part, at the stated redemption prices plus accrued interest through the redemption date. These notes rank equally in right of payment with all of the Company’s other senior unsecured indebtedness.

4.25% Senior Unsecured Notes. During March 2012, the Company issued senior unsecured notes, with face value of $650 million and bearing interest at a rate of 4.25%, for net proceeds of $643 million. Interest began accruing on March 7, 2012 and is payable semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2012. The notes will mature on March 1, 2022 and are redeemable at the Company’s option at any time, in whole or in part, at the stated redemption prices plus accrued interest through the redemption date. These notes rank equally in right of payment with all of the Company’s other senior unsecured indebtedness.

Sierra Timeshare 2012-1 Receivables Funding, LLC. During March 2012, the Company closed a series of term notes payable, Sierra Timeshare 2012-1 Receivables Funding LLC, in the initial principal amount of $450 million at an advance rate of 87.5%. These borrowings bear interest at a weighted average coupon rate of 3.01% and are secured by vacation ownership contract receivables. As of June 30, 2012, the Company had $390 million of outstanding borrowings under these term notes.

3.50% Convertible Notes

During the second quarter of 2012, the Company repaid its convertible notes with a carrying value of $45 million ($12 million for the convertible notes and $33 million for a related bifurcated conversion feature). Concurrent with the repayment, the Company settled call options for proceeds of $33 million. As a result of these transactions, the Company made a net payment of $12 million.

Concurrent with the issuance of its convertible notes, the Company entered into warrant transactions (“Warrants”) with certain counterparties. The Warrants are separate contracts entered into by the Company and are not part of its convertible notes. As of June 30, 2012, there were approximately 1 million shares related to such Warrants which are expected to be net share settled by the Company during the third quarter of 2012.

Early Extinguishment of Debt

During the first quarter of 2012, the Company repurchased a portion of its 9.875% senior unsecured notes and 6.00% senior unsecured notes through tender offers totaling $650 million. In connection with these tender offers, the Company incurred a loss of $106 million during the six months ended June 30, 2012, which is included within early extinguishment of debt on the Consolidated Statement of Income.

During each of the first two quarters of 2011, the Company repurchased a portion of its convertible notes and settled a portion of the related call options. In connection with these transactions, the Company incurred a loss of $1 million and $12 million during the three and six months ended June 30, 2011, which is included within early extinguishment of debt on the Consolidated Statements of Income.

Maturities and Capacity

The Company’s outstanding debt as of June 30, 2012 matures as follows:



	Securitized Vacation Ownership Debt		Other		Total
Within 1 year	$	191	$	11	$	202
Between 1 and 2 years	303		54		357
Between 2 and 3 years	320		11		331
Between 3 and 4 years	195		11		206
Between 4 and 5 years	193		751		944
Thereafter	652		1,428		2,080
	$	1,854	$	2,266	$	4,120

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

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As of June 30, 2012, available capacity under the Company’s borrowing arrangements was as follows:



	Securitized Bank Conduit Facility^(a)		Revolving Credit Facility
Total Capacity	$	600	$	1,000
Less: Outstanding Borrowings	220		81
Available Capacity	$	380	$	919	^(b)


^(a)	The capacity of this facility is subject to the Company’s ability to provide additional assets to collateralize additional securitized borrowings.


^(b)	The capacity under the Company’s revolving credit facility includes availability for letters of credit. As of June 30, 2012, the available capacity of $919 million was further reduced to $908 million due to the issuance of $11 million of letters of credit.

Interest Expense

The Company incurred non-securitized interest expense of $32 million and $65 million during the three and six months ended June 30, 2012, respectively. Such amounts consisted primarily of $33 million and $67 million of interest on long-term debt, partially offset by $1 million and $2 million of capitalized interest during the three and six months ended June 30, 2012, respectively, and are recorded within interest expense on the Consolidated Statements of Income. Cash paid related to such interest expense was $60 million during the six months ended June 30, 2012.

The Company incurred non-securitized interest expense of $36 million and $69 million during the three and six months ended June 30, 2011, respectively. Such amounts consisted primarily of $37 million and $72 million of interest on long-term debt, partially offset by $4 million and $6 million of capitalized interest during the three and six months ended June 30, 2011, respectively, and are recorded within interest expense on the Consolidated Statements of Income. Cash paid related to such interest expense was $66 million during the six months ended June 30, 2011.

Interest expense incurred in connection with the Company’s securitized vacation ownership debt during the three and six months ended both June 30, 2012 and 2011 was $23 million and $46 million, respectively, and is recorded within consumer financing interest on the Consolidated Statements of Income. Cash paid related to such interest was $38 million and $39 million during the six months ended June 30, 2012 and 2011, respectively.


6.	Transfer and Servicing of Financial Assets

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

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The assets and liabilities of these vacation ownership SPEs are as follows:



	June 30, 2012		December 31, 2011
Securitized contract receivables, gross ^(a)	$	2,347	$	2,485
Securitized restricted cash ^(b)	125		132
Interest receivables on securitized contract receivables ^(c)	18		20
Other assets ^(d)	—		1
Total SPE assets ^(e)	2,490		2,638
Securitized term notes ^(f)	1,634		1,625
Securitized conduit facilities ^(f)	220		237
Other liabilities ^(g)	7		11
Total SPE liabilities	1,861		1,873
SPE assets in excess of SPE liabilities	$	629	$	765


^(a)	Included in current ($243 million and $262 million as of June 30, 2012 and December 31, 2011, respectively) and non-current ($2,104 million and $2,223 million as of June 30, 2012 and December 31, 2011, respectively) vacation ownership contract receivables on the Consolidated Balance Sheets.


^(b)	Included in other current assets ($66 million and $71 million as of June 30, 2012 and December 31, 2011, respectively) and other non-current assets ($59 million and $61 million as of June 30, 2012 and December 31, 2011, respectively) on the Consolidated Balance Sheets.


^(c)	Included in trade receivables, net on the Consolidated Balance Sheets.


^(d)	Includes interest rate derivative contracts and related assets; included in other non-current assets on the Consolidated Balance Sheets.


^(e)	Excludes deferred financing costs of $25 million and $26 million as of June 30, 2012 and December 31, 2011, respectively, related to securitized debt.


^(f)	Included in current ($191 million and $196 million as of June 30, 2012 and December 31, 2011, respectively) and long-term ($1,663 million and $1,666 million as of June 30, 2012 and December 31, 2011, respectively) securitized vacation ownership debt on the Consolidated Balance Sheets.


^(g)	Primarily includes interest rate derivative contracts and accrued interest on securitized debt; included in accrued expenses and other current liabilities ($2 million and $2 million as of June 30, 2012 and December 31, 2011, respectively) and other non-current liabilities ($5 million and $9 million as of June 30, 2012 and December 31, 2011, respectively) on the Consolidated Balance Sheets.

In addition, the Company has vacation ownership contract receivables that have not been securitized through bankruptcy-remote SPEs. Such gross receivables were $867 million and $757 million as of June 30, 2012 and December 31, 2011, respectively. A summary of total vacation ownership receivables and other securitized assets, net of securitized liabilities and the allowance for loan losses, is as follows:



	June 30, 2012		December 31, 2011
SPE assets in excess of SPE liabilities	$	629	$	765
Non-securitized contract receivables	867		757
Less: Allowance for loan losses	433		394
Total, net	$	1,063	$	1,128

Restricted Cash

In addition to restricted cash related to securitizations, the Company also had $72 million and $53 million of restricted cash related to escrow deposits as of June 30, 2012 and December 31, 2011, respectively, which was recorded within other current assets on the Consolidated Balance Sheets.


7.	Fair Value

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

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

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

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observable.

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

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

The following table summarizes information regarding assets and liabilities that are measured at fair value on a recurring basis:



	As of						As of
	June 30, 2012						December 31, 2011
	Fair Value		Level 2		Level 3		Fair Value		Level 2		Level 3
Assets
Derivatives: ^(a)
Call Options	$	—	$	—	$	—	$	24	$	—	$	24
Interest rate contracts	3		3		—		4		4		—
Foreign exchange contracts	3		3		—		1		1		—
Securities available-for-sale ^(b)	6		—		6		6		—		6
Total assets	$	12	$	6	$	6	$	35	$	5	$	30
Liabilities
Derivatives:
Bifurcated Conversion Feature ^(c)	$	—	$	—	$	—	$	24	$	—	$	24
Interest rate contracts ^(d)	5		5		—		10		10		—
Foreign exchange contracts ^(d)	3		3		—		3		3		—
Total liabilities	$	8	$	8	$	—	$	37	$	13	$	24


^(a)	Included in other current assets ($3 million and $25 million as of June 30, 2012 and December 31, 2011, respectively) and other non-current assets ($3 million and $4 million as of June 30, 2012 and December 31, 2011, respectively) on the Consolidated Balance Sheets; carrying value is equal to estimated fair value.


^(b)	Included in other non-current assets on the Consolidated Balance Sheets.


^(c)	Included in current portion of long-term debt on the Consolidated Balance Sheet as of December 31, 2011; carrying value is equal to estimated fair value.


^(d)	Included in accrued expenses and other current liabilities ($3 million and $4 million as of June 30, 2012 and December 31, 2011, respectively) and other non-current liabilities ($5 million and $9 million as of June 30, 2012 and December 31, 2011, respectively) on the Consolidated Balance Sheets; carrying value is equal to estimated fair value.

The Company’s derivative instruments primarily consist of pay-fixed/receive-variable interest rate swaps, pay-variable/receive-fixed interest rate swaps, interest rate caps, foreign exchange forward contracts and foreign exchange average rate forward contracts (see Note 8 – Derivative Instruments and Hedging 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 using a fair value model, such as a discounted cash flow model.

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The following tables present additional information about financial assets which are measured at fair value on a recurring basis for which the Company has utilized significant unobservable Level 3 inputs to determine fair value as of June 30, 2012 and June 30, 2011:



	Derivative Asset-Call Options			Derivative Liability- Bifurcated Conversion Feature			Securities Available-For-Sale
Balance as of December 31, 2011	$	24		$	(24	)	$	6
Change in fair value	9			(9		)	—
Repayment of debt/settlement of call options	(33		)	33			—
Balance as of June 30, 2012	$	—		$	—		$	6



	Derivative Asset-Call Options			Derivative Liability- Bifurcated Conversion Feature			Securities Available-For-Sale
Balance as of December 31, 2010	$	162		$	(162	)	$	6
Convertible notes activity ^(*)	(156		)	156			—
Change in fair value	15			(15		)	—
Balance as of June 30, 2011	$	21		$	(21	)	$	6


^(*)	Represents the change in value resulting from the Company’s repurchase of a portion of its convertible notes and the settlement of a corresponding portion of the call options.

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



	June 30, 2012				December 31, 2011
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets
Vacation ownership contract receivables, net	$	2,781	$	3,217	$	2,848	$	3,232
Debt
Total debt ^(*)	4,120		4,318		4,015		4,205

^(*) As of December 31, 2011, includes $24 million related to a bifurcated conversion feature liability.

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

The Company estimates the fair value of its securitized vacation ownership debt by obtaining Level 2 inputs comprised of indicative bids from investment banks that actively issue and facilitate the secondary market for timeshare securities. The Company estimates the fair value of its other long-term debt, excluding capital leases, using Level 2 inputs based on indicative bids from investment banks and determines the fair value of its senior notes using quoted market prices.

In accordance with the guidance for equity method investments, during the first quarter of 2011, an investment in an international joint venture in the Company’s lodging business with a carrying amount of $13 million was written down due to the impairment of cash flows resulting from the Company’s partner having an indirect relationship with the Libyan government. Such write-down resulted in a $13 million charge, which is included within asset impairment on the

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Consolidated Statement of Income.


8.	Derivative Instruments and Hedging Activities

Foreign Currency Risk

The Company uses freestanding foreign currency forward contracts and foreign currency forward contracts designated as cash flow hedges to manage its exposure to changes in foreign currency exchange rates associated with its foreign currency denominated receivables, forecasted earnings of foreign subsidiaries and forecasted foreign currency denominated vendor payments. The amount of gains or losses the Company expects to reclassify from 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 Company’s operations is exposed to interest rate fluctuations. The Company uses various hedging strategies and derivative financial instruments to create a desired mix of fixed and floating rate assets and liabilities. Derivative instruments currently used in these hedging strategies include swaps and interest rate caps. The derivatives used to manage the risk associated with the Company’s floating rate debt include freestanding derivatives and derivatives designated as cash flow hedges. The Company also uses swaps to convert specific fixed-rate debt into variable-rate debt (i.e., fair value hedges) to manage the overall interest cost. For relationships designated as fair value hedges, changes in fair value of the derivatives are recorded in income with offsetting adjustments to the carrying amount of the hedged debt. The amount of losses that the Company expects to reclassify from accumulated other comprehensive income (“AOCI”) to earnings during the next 12 months is not material.

The following table summarizes information regarding the gain amounts recognized in AOCI:



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
Designated hedging instruments
Interest rate contracts	$	2	$	1	$	3	$	3

The following table summarizes information regarding the gain/(loss) recognized in income on the Company’s freestanding derivatives:



	Three Months Ended							Six Months Ended
	June 30,							June 30,
	2012			2011				2012			2011
Non-designated hedging instruments
Foreign exchange contracts ^(a)	$	(7	)	$	(4	)		$	(3	)	$	(7	)
Interest rate contracts	—			3			^(b)	—			6			^(b)
Call Options	1			4				9			15
Bifurcated Conversion Feature	(1		)	(4		)		(9		)	(15		)
Total	$	(7	)	$	(1	)		$	(3	)	$	(1	)


^(a)	Included within operating expenses on the Consolidated Statements of Income.


^(b)	Included primarily within interest expense on the Consolidated Statements of Income.

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The following table summarizes information regarding the fair value of the Company's derivative instruments:



		As of		As of
	Balance Sheet Location	June 30, 2012		December 31, 2011
Designated hedging instruments
Liabilities
Interest rate contracts	Other non-current liabilities	$	5	$	9
Foreign exchange contracts	Accrued expenses and other current liabilities	2		1
Total		$	7	$	10
Non-designated hedging instruments
Assets
Interest rate contracts	Other non-current assets	$	3	$	4
Foreign exchange contracts	Other current assets	3		1
Call Options	Other current assets	—		24
Total		$	6	$	29
Liabilities
Interest rate contracts	Other non-current liabilities	$	—	$	1
Foreign exchange contracts	Accrued expenses and other current liabilities	1		2
Bifurcated Conversion Feature	Current portion of long-term debt	—		24
Total		$	1	$	27

9. Income Taxes

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for years prior to 2008. In addition, with few exceptions, the Company is no longer subject to state and local, or non-U.S. income tax examinations for years prior to 2004.

The Company’s effective tax rate declined from 41.8% during the three months ended June 30, 2011 to 37.9% for the three months ended June 30, 2012 primarily due to the absence of the tax expense resulting from the refund of value added taxes during the second quarter of 2011.

The Company's effective tax rate declined from 40.4% for the six months ended June 30, 2011 to 36.4% for the six months ended June 30, 2012 primarily due to the tax benefit derived from the loss on the early extinguishment of debt during the first quarter of 2012, as well as the absence of the tax expense resulting from the refund of value added taxes during the second quarter of 2011.

The Company made cash income tax payments, net of refunds, of $79 million and $71 million during the six months ended June 30, 2012 and 2011, respectively.


10.	Commitments and Contingencies

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

Wyndham Worldwide Corporation Litigation

The Company is involved in claims, legal and regulatory proceedings and governmental inquiries arising in the ordinary course of its business including but not limited to: for its lodging business—breach of contract, fraud and bad faith claims between franchisors and franchisees in connection with franchise agreements and with owners in connection with management contracts; negligence, breach of contract, fraud, employment, consumer protection and other statutory claims asserted in connection with alleged acts or occurrences at franchised or managed properties; for its vacation exchange and rentals business—breach of contract, fraud and bad faith claims by affiliates and customers in connection with their respective agreements; negligence, breach of contract, fraud, consumer protection and other statutory claims asserted by members and guests for alleged injuries sustained at affiliated resorts and vacation rental properties; for its vacation ownership business—breach of contract, bad faith, conflict of interest, fraud, consumer protection and other statutory claims by property owners' associations, owners and prospective owners in connection with the sale or use of VOIs or land,

or the management of vacation ownership resorts; construction defect claims relating to vacation ownership units or resorts; and negligence, breach of contract, fraud, consumer protection and other statutory claims by guests for alleged injuries sustained at vacation ownership units or resorts; and for each of its businesses, bankruptcy proceedings involving efforts to collect receivables from a debtor in bankruptcy; employment matters which may include claims of retaliation discrimination, harassment and wage and hour claims; claims of infringement upon third parties' intellectual property rights, claims relating to information security, privacy, consumer protection, tax claims and environmental claims.

On June 26, 2012, the U.S. Federal Trade Commission ("FTC") filed a lawsuit in Federal District Court for the District of Arizona against the Company and its subsidiaries, Wyndham Hotel Group, LLC, Wyndham Hotels & Resorts Inc. and Wyndham Hotel Management Inc., alleging unfairness and deception-based violations of Section 5 of the FTC Act in connection with three prior data breach incidents involving a group of Wyndham brand hotels. The Company disputes the allegations in the lawsuit and is defending this lawsuit vigorously. The Company does not expect that the outcome of this litigation will be material to the Company.

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

The Company believes that it has adequately accrued for such matters with reserves of $33 million and $35 million as of June 30, 2012 and December 31, 2011, respectively. Such amount is exclusive of matters relating to the Company’s separation from its former Parent (“Separation”). For matters not requiring accrual, the Company believes that such matters will not have a material effect on its results of operations, financial position or cash flows based on information currently available.

Cendant Litigation

Under the Separation agreement, the Company agreed to be responsible for 37.5% of certain of Cendant’s contingent and other corporate liabilities and associated costs, including certain contingent litigation. Since the Separation, Cendant settled the majority of the lawsuits pending on the date of the Separation.

11. Accumulated Other Comprehensive Income

The components of AOCI are as follows:



	June 30, 2012			December 31, 2011
Foreign currency translation adjustments	$	134		$	141
Unrealized losses on cash flow hedges	(7		)	(10		)
Defined benefit pension plans	(3		)	(3		)
Total AOCI ^(*)	$	124		$	128

^(*) Includes $38 million and $40 million of tax benefit as of June 30, 2012 and December 31, 2011, respectively.

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.


12.	Stock-Based Compensation

The Company has a stock-based compensation plan available to grant RSUs, SSARs, PSUs and other stock or cash-based awards to key employees, non-employee directors, advisors and consultants. Under the Wyndham Worldwide Corporation 2006 Equity and Incentive Plan, as amended, a maximum of 36.7 million shares of common stock may be awarded. As of June 30, 2012, 16.4 million shares remained available.

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Incentive Equity Awards Granted by the Company

The activity related to incentive equity awards granted by the Company for the six months ended June 30, 2012 consisted of the following:



	RSUs					SSARs
	Number of RSUs			Weighted Average Grant Price		Number of SSARs			Weighted Average Exercise Price
Balance as of December 31, 2011	5.0			$	18.02	2.2			$	21.28
Granted	1.1		^(b)	44.57		0.1		^(b)	44.57
Vested/exercised	(2.7	)		12.54		(0.2	)		26.65
Canceled	(0.1	)		20.06		—			—
Balance as of June 30, 2012 ^(a)	3.3		^(c)	31.71		2.1		^(d)	21.97


^(a)	Aggregate unrecognized compensation expense related to RSUs and SSARs was $94 million as of June 30, 2012 which is expected to be recognized over a weighted average period of 3 years.


^(b)	Primarily represents awards granted by the Company on March 1, 2012.


^(c)	Approximately 3.1 million RSUs outstanding as of June 30, 2012 are expected to vest over time.


^(d)	Approximately 1.8 million of the 2.1 million SSARs are exercisable as of June 30, 2012. The Company assumes that all unvested SSARs are expected to vest over time. SSARs outstanding as of June 30, 2012 had an intrinsic value of $65 million and have a weighted average remaining contractual life of 2.2 years.

On March 1, 2012, the Company approved grants of incentive equity awards totaling $51 million to key employees and senior officers of Wyndham in the form of RSUs and SSARs. These awards will vest ratably over a period of four years. In addition, on March 1, 2012, the Company approved a grant of incentive equity awards totaling $12 million to key employees and senior officers of Wyndham in the form of PSUs. These awards cliff vest on the third anniversary of the grant date, contingent upon the Company achieving certain performance metrics. As of June 30, 2012, there were approximately 609,000 PSUs outstanding with an aggregate unrecognized compensation expense of $17 million.

The fair value of SSARs granted by the Company on March 1, 2012 was estimated on the date of the grant using the Black-Scholes option-pricing model with the relevant weighted average assumptions outlined in the table below. Expected volatility is based on both historical and implied volatilities of the Company’s stock over the estimated expected life of the SSARs. The expected life represents the period of time the SSARs are expected to be outstanding and is based on historical experience given consideration to the contractual terms and vesting periods of the SSARs. The risk free interest rate is based on yields on U.S. Treasury strips with a maturity similar to the estimated expected life of the SSARs. The projected dividend yield was based on the Company’s anticipated annual dividend divided by the price of the Company’s stock on the date of the grant.



	SSARs Issued on
	March 1, 2012
Grant date fair value	$	15.34
Grant date strike price	$	44.57
Expected volatility	43.34		%
Expected life	6 yrs.
Risk free interest rate	1.21		%
Projected dividend yield	2.06		%

Stock-Based Compensation Expense

The Company recorded stock-based compensation expense of $11 million and $20 million during the three and six months ended June 30, 2012, respectively, and $12 million and $21 million during the three and six months ended June 30, 2011, respectively, related to the incentive equity awards granted by the Company. The Company recognized a net tax benefit of $4 million and $8 million during the three and six months ended June 30, 2012, respectively, and $5 million and $8 million of a net tax benefit during the three and six months ended June 30, 2011, respectively, for stock-based compensation arrangements on the Consolidated Statements of Income. During the six months ended June 30, 2012, the Company increased its pool of excess tax benefits available to absorb tax deficiencies (“APIC Pool”) by $25 million due to the vesting of RSUs and exercise of stock options. As of June 30, 2012, the Company’s APIC Pool balance was $55 million.

Table of Contents

The Company paid $42 million and $29 million of taxes for the net share settlement of incentive equity awards during the six months ended June 30, 2012 and 2011, respectively. Such amount is included within financing activities on the Consolidated Statements of Cash Flows.


13.	Segment Information

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



	Three Months Ended June 30,
	2012							2011
	Net Revenues			EBITDA				Net Revenues			EBITDA
Lodging	$	233		$	75		^(b)	$	190		$	66
Vacation Exchange and Rentals	348			82				361			106		^(d)
Vacation Ownership	570			150				541			130
Total Reportable Segments	1,151			307				1,092			302
Corporate and Other ^(a)	(12		)	(25		)	^(c)	(2		)	(26