WYN-2013.9.30-10Q

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 September 30, 2013


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

For the transition period from to

Commission File No. 001-32876

Wyndham Worldwide Corporation

(Exact name of registrant as specified in its charter)



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

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

(973) 753-6000

(Registrant’s telephone number, including area code)

None

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

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

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

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



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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:

130,306,798 shares of common stock outstanding as of September 30, 2013.

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		Page
PART I	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements (Unaudited)	1
	Report of Independent Registered Public Accounting Firm	1
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2013 and 2012	2
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2013 and 2012	3
	Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012	4
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012	5
	Consolidated Statements of Equity for the Nine Months Ended September 30, 2013 and 2012	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
	Forward-Looking Statements	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risks	44
Item 4.	Controls and Procedures	44
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
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. Consolidated Financial Statements (Unaudited).

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Wyndham Worldwide Corporation

Parsippany, New Jersey

We have reviewed the accompanying consolidated balance sheet of Wyndham Worldwide Corporation and subsidiaries (the "Company") as of September 30, 2013, the related consolidated statements of income and comprehensive income for the three-month and nine-month periods ended September 30, 2013 and 2012 and the related consolidated statements of cash flows and equity for the nine-month periods ended September 30, 2013 and 2012. 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, 2012, and the related consolidated statements of income, comprehensive income, equity and cash flows for the year then ended (not presented herein); and in our report dated February 15, 2013, 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, 2012 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 23, 2013

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WYNDHAM WORLDWIDE CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(In millions, except per share amounts)

(Unaudited)



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Net revenues
Service and membership fees	$	680		$	566		$	1,833		$	1,558
Vacation ownership interest sales	384			373			995			987
Franchise fees	186			168			460			449
Consumer financing	107			106			318			311
Other	70			52			208			135
Net revenues	1,427			1,265			3,814			3,440
Expenses
Operating	589			495			1,645			1,389
Cost of vacation ownership interests	43			45			107			115
Consumer financing interest	19			23			60			69
Marketing and reservation	213			197			570			554
General and administrative	186			172			528			481
Depreciation and amortization	54			45			160			136
Total expenses	1,104			977			3,070			2,744
Operating income	323			288			744			696
Other income, net	(2		)	—			(6		)	(9		)
Interest expense	31			32			97			98
Early extinguishment of debt	—			2			111			108
Interest income	(2		)	(2		)	(6		)	(7		)
Income before income taxes	296			256			548			506
Provision for income taxes	109			97			201			187
Net income	187			159			347			319
Net (income)/loss attributable to noncontrolling interest	—			—			(1		)	1
Net income attributable to Wyndham shareholders	$	187		$	159		$	346		$	320
Earnings per share
Basic	$	1.42		$	1.13		$	2.58		$	2.20
Diluted	1.40			1.11			2.55			2.16

Cash dividends declared per share	$	0.29		$	0.23		$	0.87		$	0.69

See Notes to Consolidated Financial Statements.

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WYNDHAM WORLDWIDE CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)



	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2013			2012		2013			2012
Net income	$	187		$	159	$	347		$	319
Other comprehensive income/(loss), net of tax
Foreign currency translation adjustments	39			19		(28		)	12
Unrealized gain/(loss) on cash flow hedges	(1		)	1		1			4
Other comprehensive income/(loss), net of tax	38			20		(27		)	16
Comprehensive income	225			179		320			335
Net (income)/loss attributable to noncontrolling interest	—			—		(1		)	1
Comprehensive income attributable to Wyndham shareholders	$	225		$	179	$	319		$	336

See Notes to Consolidated Financial Statements.

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WYNDHAM WORLDWIDE CORPORATION

CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

(Unaudited)



	September 30, 2013			December 31, 2012
Assets
Current assets:
Cash and cash equivalents	$	269		$	195
Trade receivables, net	429			442
Vacation ownership contract receivables, net	308			318
Inventory	327			379
Prepaid expenses	136			122
Deferred income taxes	97			157
Other current assets	298			253
Total current assets	1,864			1,866
Long-term vacation ownership contract receivables, net	2,447			2,571
Non-current inventory	687			698
Property and equipment, net	1,513			1,292
Goodwill	1,579			1,566
Trademarks, net	730			730
Franchise agreements and other intangibles, net	436			459
Other non-current assets	410			281
Total assets	$	9,666		$	9,463
Liabilities and Equity
Current liabilities:
Securitized vacation ownership debt	$	186		$	218
Current portion of long-term debt	55			326
Accounts payable	309			307
Deferred income	445			383
Due to former Parent and subsidiaries	22			22
Accrued expenses and other current liabilities	663			675
Total current liabilities	1,680			1,931
Long-term securitized vacation ownership debt	1,702			1,742
Long-term debt	2,888			2,276
Deferred income taxes	1,130			1,141
Deferred income	203			207
Due to former Parent and subsidiaries	17			17
Other non-current liabilities	364			218
Total liabilities	7,984			7,532
Commitments and contingencies (Note 12)
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 215,516,020 shares in 2013 and 214,812,395 shares in 2012	2			2
Treasury stock, at cost – 85,455,762 shares in 2013 and 77,523,995 shares in 2012	(3,076		)	(2,601		)
Additional paid-in capital	3,845			3,820
Retained earnings	785			558
Accumulated other comprehensive income	124			151
Total stockholders’ equity	1,680			1,930
Noncontrolling interest	2			1
Total equity	1,682			1,931
Total liabilities and equity	$	9,666		$	9,463

See Notes to Consolidated Financial Statements.

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WYNDHAM WORLDWIDE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)



	Nine Months Ended
	September 30,
	2013			2012
Operating Activities
Net income	$	347		$	319
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	160			136
Provision for loan losses	275			320
Deferred income taxes	42			40
Stock-based compensation	38			31
Excess tax benefits from stock-based compensation	(13		)	(27		)
Early extinguishment of debt	106			107
Non-cash interest	21			17
Net change in assets and liabilities, excluding the impact of acquisitions and dispositions:
Trade receivables	12			42
Vacation ownership contract receivables	(171		)	(247		)
Inventory	25			68
Prepaid expenses	(14		)	19
Other current assets	(11		)	(12		)
Accounts payable, accrued expenses and other current liabilities	(4		)	5
Due to former Parent and subsidiaries, net	—			(3		)
Deferred income	44			(17		)
Other, net	1			10
Net cash provided by operating activities	858			808
Investing Activities
Property and equipment additions	(153		)	(123		)
Net assets acquired, net of cash acquired	(128		)	(204		)
Development advances	(54		)	(3		)
Equity investments and loans	(3		)	(45		)
Proceeds from asset sales	6			—
Decrease in securitization restricted cash	19			10
Increase in escrow deposit restricted cash	(6		)	(11		)
Other, net	2			(1		)
Net cash used in investing activities	(317		)	(377		)
Financing Activities
Proceeds from securitized borrowings	1,203			1,265
Principal payments on securitized borrowings	(1,276		)	(1,204		)
Proceeds from long-term debt	377			1,818
Principal payments on long-term debt	(327		)	(1,793		)
Repayments of commercial paper, net	(108		)	—
Proceeds from note issuances	843			941
Repurchase of notes	(636		)	(757		)
Proceeds from vacation ownership inventory arrangement	87			—
Repayment of convertible notes	—			(45		)
Proceeds from call options	—			33
Dividends to shareholders	(119		)	(102		)
Repurchase of common stock	(473		)	(476		)
Proceeds from stock option exercises	—			13
Excess tax benefits from stock-based compensation	13			27
Debt issuance costs	(18		)	(15		)
Net share settlement of incentive equity awards	(26		)	(44		)
Other, net	(4		)	(1		)
Net cash used in financing activities	(464		)	(340		)
Effect of changes in exchange rates on cash and cash equivalents	(3		)	(1		)
Net increase in cash and cash equivalents	74			90
Cash and cash equivalents, beginning of period	195			142
Cash and cash equivalents, end of period	$	269		$	232

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, 2012	137		$	2	$	(2,601	)	$	3,820		$	558		$	151		$	1	$	1,931
Net income	—		—		—			—			346			—			1		347
Other comprehensive loss	—		—		—			—			—			(27		)	—		(27		)
Issuance of shares for RSU vesting	1		—		—			—			—			—			—		—
Net share settlement of incentive equity awards	—		—		—			(26		)	—			—			—		(26		)
Change in deferred compensation	—		—		—			38			—			—			—		38
Repurchase of common stock	(8	)	—		(475		)	—			—			—			—		(475		)
Change in excess tax benefit on equity awards	—		—		—			13			—			—			—		13
Dividends	—		—		—			—			(119		)	—			—		(119		)
Balance as of September 30, 2013	130		$	2	$	(3,076	)	$	3,845		$	785		$	124		$	2	$	1,682



	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	—		—		—			—			320			—		(1		)	319
Other comprehensive income	—		—		—			—			—			16		—			16
Exercise of stock options and SSARs	—		—		—			13			—			—		—			13
Issuance of shares for RSU vesting	2		—		—			—			—			—		—			—
Net share settlement of incentive equity awards	—		—		—			(44		)	—			—		—			(44		)
Change in deferred compensation	—		—		—			31			—			—		—			31
Repurchase of common stock	(10	)	—		(473		)	—			—			—		—			(473		)
Settlement of warrants	1		—		32			(32		)	—			—		—			—
Change in excess tax benefit on equity awards	—		—		—			26			—			—		—			26
Dividends	—		—		—			—			(103		)	—		—			(103		)
Other	—		—		—			2			—			—		—			2
Balance as of September 30, 2012	140		$	2	$	(2,450	)	$	3,814		$	510		$	144	$	(1	)	$	2,019

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 2012 Consolidated Financial Statements included in its Annual Report filed on Form 10-K with the Securities and Exchange Commission on February 15, 2013.

Business Description

The Company operates in the following business segments:


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


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


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

Recently Issued Accounting Pronouncements

Comprehensive Income. In February 2013, the Financial Accounting Standards Board ("FASB") issued guidance to improve the reporting of amounts reclassified out of accumulated other comprehensive income ("AOCI"). The guidance amends the presentation of changes in AOCI and requires an entity to disaggregate the total change of each component of other comprehensive income either on the face of the statement of income or as a separate disclosure in the notes. This guidance is effective prospectively for fiscal years beginning after December 15, 2012. The Company adopted the guidance on January 1, 2013, as required. There was no material impact on its Consolidated Financial Statements resulting from the adoption.

Foreign Currency Matters. In March 2013, the FASB issued guidance on a parent's accounting for the cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign entity. The guidance requires that the parent release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. This guidance is effective prospectively for fiscal years beginning after December 15, 2013, and for interim periods within those fiscal years. The Company will adopt the guidance on January 1, 2014, as required, and it believes the adoption of this guidance will not have a material impact on its Consolidated Financial Statements.

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2.	Earnings Per Share

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

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



	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2013		2012			2013			2012
Net income attributable to Wyndham shareholders	$	187	$	159		$	346		$	320
Basic weighted average shares	131		141			134			145
Stock options, SSARs and RSUs ^(a)	2		2			2		^(d)	2
Warrants	—		1		^(c)	—			1		^(c)
Weighted average diluted shares ^(b)	133		144			136			148
Earnings per share:
Basic	$	1.42	$	1.13		$	2.58		$	2.20
Diluted	1.40		1.11			2.55			2.16


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


^(b)	Excludes 828,000 performance vested restricted stock units ("PSUs") for both the three and nine months ended September 30, 2013, respectively, and 607,000 PSUs for both the three and nine months ended September 30, 2012, respectively, as the Company has not met the required performance metrics.


^(c)	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.


^(d)	Excludes 69,000 stock-settled stock appreciation rights ("SSARs") for the nine months ended September 30, 2013, as their inclusion would have been anti-dilutive to EPS.

Dividend Payments

During each of the quarterly periods ended March 31, June 30 and September 30, 2013, the Company paid cash dividends of $0.29 per share ($119 million in the aggregate). During each of the quarterly periods ended March 31, June 30 and September 30, 2012, the Company paid cash dividends of $0.23 per share ($102 million in the aggregate).

Stock Repurchase Program

The following table summarizes stock repurchase activity under the current stock repurchase program (in millions, except per share data):



	Shares	Cost		Average Price Per share
As of December 31, 2012	53.0	$	1,820	$	34.33
For the nine months ended September 30, 2013	7.9	475		59.84
As of September 30, 2013	60.9	$	2,295	37.65

The Company had $782 million of remaining availability in its program as of September 30, 2013.

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3.	Acquisitions

Assets acquired and liabilities assumed in business combinations were recorded on the Consolidated Balance Sheets as of the respective acquisition dates based upon their estimated fair values at such dates. The results of operations of businesses acquired by the Company have been included in the Consolidated Statements of Income since their respective dates of acquisition. The excess of the purchase price over the estimated fair values of the underlying assets acquired and liabilities assumed was allocated to goodwill. In certain circumstances, the allocations of the excess purchase price are based upon preliminary estimates and assumptions. Accordingly, the allocations may be subject to revision when the Company receives final information, including appraisals and other analyses. Any revisions to the fair values during the allocation period will be recorded by the Company as further adjustments to the purchase price allocations. Although, in certain circumstances, the Company has substantially integrated the operations of its acquired businesses, additional future costs relating to such integration may occur. These costs may result from integrating operating systems, relocating employees, closing facilities, reducing duplicative efforts and exiting and consolidating other activities. These costs will be recorded on the Consolidated Statements of Income as expenses.

Vacation Ownership NYC Property. During January 2013, the Company entered into an agreement with a third party partner whereby the partner acquired the Alex hotel in New York City for $115 million through a special purpose entity ("SPE"). The Company is considered to be the primary beneficiary of the SPE and therefore the Company consolidates the SPE within its financial statements. The Company is managing and operating the hotel while the Company converts it into VOI inventory. The SPE's preliminary purchase price allocation for this hotel resulted in the recognition of $115 million of property and equipment, all of which was assigned to the Company's Vacation Ownership segment. Acquisition-related costs of $2 million are included in operating expenses in the accompanying Consolidated Statement of Income for the nine months ended September 30, 2013. This SPE transaction is consistent with the Company's strategy to replenish VOI inventory utilizing its Wyndham Asset Affiliation Model. The consolidation of the SPE was not material to the Company's results of operations, financial position or cash flows (see Note 8 - Variable Interest Entities for more detailed information).


4.	Intangible Assets

Intangible assets consisted of:



	As of September 30, 2013						As of December 31, 2012
	Gross				Net		Gross				Net
	Carrying		Accumulated		Carrying		Carrying		Accumulated		Carrying
	Amount		Amortization		Amount		Amount		Amortization		Amount
Unamortized Intangible Assets:
Goodwill	$	1,579					$	1,566
Trademarks	$	724					$	724
Amortized Intangible Assets:
Franchise agreements	$	594	$	352	$	242	$	594	$	340	$	254
Trademarks	8		2		6		7		1		6
Other	273		79		194		270		65		205
	$	875	$	433	$	442	$	871	$	406	$	465

The changes in the carrying amount of goodwill are as follows:



			Goodwill		Goodwill
	Balance as of		Acquired		Acquired		Foreign			Balance as of
	December 31, 2012		During 2013		During 2012		Exchange			September 30, 2013
Lodging	$	300	$	—	$	—	$	—		$	300
Vacation Exchange and Rentals	1,241		10		4		(3		)	1,252
Vacation Ownership	25		—		2		—			27
Total Company	$	1,566	$	10	$	6	$	(3	)	$	1,579

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Amortization expense relating to amortizable intangible assets was as follows:



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Franchise agreements	$	3	$	4	$	11	$	13
Trademarks and Other	6		3		16		9
Total ^(*)	$	9	$	7	$	27	$	22

^(*) Included as a component of depreciation and amortization on the Consolidated Statements of Income.

Based on the Company's amortizable intangible assets as of September 30, 2013, the Company expects related amortization expense as follows:



	Amount
Remainder of 2013	$	9
2014	36
2015	34
2016	33
2017	32
2018	31


5.	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:



	September 30, 2013		December 31, 2012
Current vacation ownership contract receivables:
Securitized	$	223	$	252
Non-securitized	143		118
	366		370
Less: Allowance for loan losses	58		52
Current vacation ownership contract receivables, net	$	308	$	318
Long-term vacation ownership contract receivables:
Securitized	$	1,964	$	2,149
Non-securitized	986		867
	2,950		3,016
Less: Allowance for loan losses	503		445
Long-term vacation ownership contract receivables, net	$	2,447	$	2,571

During the three and nine months ended September 30, 2013, the Company’s securitized vacation ownership contract receivables generated interest income of $73 million and $226 million, respectively. During the three and nine months ended September 30, 2012, such amounts were $76 million and $229 million, respectively. Such interest income is included in consumer financing revenues on the Consolidated Statements of Income.

Principal payments that are contractually due on the Company’s vacation ownership contract receivables during the next twelve months are classified as current on the Consolidated Balance Sheets. During the nine months ended September 30, 2013 and 2012, the Company originated vacation ownership contract receivables of $785 million and $822 million, respectively, and received principal collections of $614 million and $575 million, respectively. The weighted average interest rate on outstanding vacation ownership contract receivables was 13.5% and 13.4% as of September 30, 2013 and December 31, 2012, respectively.

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



	Amount
Allowance for loan losses as of December 31, 2012	$	497
Provision for loan losses	275
Contract receivables write-offs, net	(211		)
Allowance for loan losses as of September 30, 2013	$	561



	Amount
Allowance for loan losses as of December 31, 2011	$	394
Provision for loan losses	320
Contract receivables write-offs, net	(228		)
Allowance for loan losses as of September 30, 2012	$	486

In accordance with the guidance for accounting for real estate timesharing transactions, the Company recorded a provision for loan losses of $102 million and $275 million as a reduction of net revenues during the three and nine months ended September 30, 2013, respectively, and $124 million and $320 million during the three and nine months ended September 30, 2012, respectively.

Credit Quality for Financed Receivables and the Allowance for Credit Losses

The basis of the differentiation within the identified class of financed VOI contract receivables is the consumer’s FICO score. A FICO score is a branded version of a consumer credit score widely used within the U.S. by the largest banks and lending institutions. FICO scores range from 300 – 850 and are calculated based on information obtained from one or more of the three major U.S. credit reporting agencies that compile and report on a consumer’s credit history. The Company updates its records for all active VOI contract receivables with a balance due on a rolling monthly basis 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 policy described above):



	As of September 30, 2013
	700+		600-699		<600		No Score		Asia Pacific		Total
Current	$	1,501	$	1,065	$	236	$	101	$	286	$	3,189
31 - 60 days	12		24		20		3		4		63
61 - 90 days	7		10		13		2		1		33
91 - 120 days	5		10		13		1		2		31
Total	$	1,525	$	1,109	$	282	$	107	$	293	$	3,316

	As of December 31, 2012
	700+		600-699		<600		No Score		Asia Pacific		Total
Current	$	1,459	$	1,064	$	274	$	94	$	312	$	3,203
31 - 60 days	13		26		23		3		5		70
61 - 90 days	10		14		17		2		2		45
91 - 120 days	13		30		23		1		1		68
Total	$	1,495	$	1,134	$	337	$	100	$	320	$	3,386

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

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6.	Inventory

Inventory consisted of:



	September 30, 2013		December 31, 2012
Land held for VOI development	$	102	$	137
VOI construction in process	97		147
Inventory sold subject to conditional repurchase ^(a)	114		—
Completed inventory and vacation credits ^{(b) (c)}	701		793
Total inventory	1,014		1,077
Less: Current portion	327		379
Non-current inventory	$	687	$	698


^(a)	Comprised of $76 million of VOI construction in process and $38 million of land held for VOI development.


^(b)	Includes estimated recoveries of $229 million and $202 million as of September 30, 2013 and December 31, 2012, respectively.


^(c)	Vacation credits relate to both the Company’s vacation ownership and vacation exchange and rentals businesses of which $66 million and $69 million as of September 30, 2013 and December 31, 2012, 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.

Inventory Sale Transaction

During June 2013, the Company sold real property located in Las Vegas, Nevada, to a third party developer, consisting of $114 million of vacation ownership inventory and $3 million of property and equipment. Total consideration was $117 million, of which $87 million was cash and $30 million was a note receivable. The Company recognized no gain or loss on this transaction.

In accordance with the agreement with the third party developer, the Company has conditional rights and a conditional obligation to repurchase the completed property from the developer subject to the property meeting the Company's vacation ownership resort standards and provided that the third party developer has not sold the property to another party (see Note 12 - Commitments and Contingencies for more detailed information). Under the sale of real estate accounting guidance, the conditional rights and obligation of the Company constitute continuing involvement and thus the Company was unable to account for this transaction as a sale. The property was sold to a variable interest entity (“VIE”) for which the Company is not the primary beneficiary as the Company does not control the entity's development activities and cannot prevent the entity from selling the property to another party. Accordingly, the Company does not consolidate the VIE.

In connection with this transaction, the Company has an outstanding obligation of $118 million and a note receivable of $31 million as of September 30, 2013, which are recorded within other non-current liabilities and other non-current assets, respectively, on the Consolidated Balance Sheet. Interest on the note receivable accrues at 3% per annum and is expected to be paid with the principal at maturity in December 2014. The $87 million of cash consideration received is included in proceeds from vacation ownership inventory arrangement in the financing section on the Consolidated Statement of Cash Flows for the nine months ended September 30, 2013. The note receivable and corresponding long-term obligation were non-cash and as such, are excluded from the Company's Consolidated Statement of Cash Flows.

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7.	Long-Term Debt and Borrowing Arrangements

The Company’s indebtedness consisted of:



	September 30, 2013			December 31, 2012
Securitized vacation ownership debt: ^(a)
Term notes	$	1,615		$	1,770
Bank conduit facility	273			190
Total securitized vacation ownership debt	1,888			1,960
Less: Current portion of securitized vacation ownership debt	186			218
Long-term securitized vacation ownership debt	$	1,702		$	1,742
Long-term debt: ^(b)
Revolving credit facility (due July 2018)	$	74		$	85
Commercial paper	164			273
9.875% senior unsecured notes	—			42		^(d)
$315 million 6.00% senior unsecured notes (due December 2016)	318		^(c)	361		^(e)
$300 million 2.95% senior unsecured notes (due March 2017)	298			298
$14 million 5.75% senior unsecured notes (due February 2018)	14			248		^(f)
$450 million 2.50% senior unsecured notes (due March 2018)	447			—
$40 million 7.375% senior unsecured notes (due March 2020)	40			248		^(f)
$250 million 5.625% senior unsecured notes (due March 2021)	246			246
$650 million 4.25% senior unsecured notes (due March 2022)	644			644
$400 million 3.90% senior unsecured notes (due March 2023)	396			—
Capital leases	185			105
Other	117			52
Total long-term debt	2,943			2,602
Less: Current portion of long-term debt	55			326
Long-term debt	$	2,888		$	2,276


^(a)	Represents non-recourse debt that is securitized through bankruptcy-remote SPEs, the creditors of which have no recourse to the Company for principal and interest. These outstanding borrowings are collateralized by $2,306 million and $2,543 million of underlying gross vacation ownership contract receivables and related assets as of September 30, 2013 and December 31, 2012, respectively.


^(b)	The carrying amounts of the senior unsecured notes are net of unamortized discount of $18 million as of both September 30, 2013 and December 31, 2012.


^(c)	Includes $3 million of unamortized gains from the settlement of a derivative.


^(d)	Aggregate principal balance as of December 31, 2012 was $43 million.


^(e)	Includes aggregate principal balance as of December 31, 2012 of $357 million and $5 million of unamortized gains from the settlement of a derivative.


^(f)	Aggregate principal balance as of December 31, 2012 was $250 million.

2013 Debt Issuances

2.50% Senior Unsecured Notes. During February 2013, the Company issued senior unsecured notes, with face value of $450 million and bearing interest at a rate of 2.50%, for net proceeds of $447 million. Interest began accruing on February 22, 2013 and is payable semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2013. The notes will mature on March 1, 2018 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.

3.90% Senior Unsecured Notes. During February 2013, the Company issued senior unsecured notes, with face value of $400 million and bearing interest at a rate of 3.90%, for net proceeds of $397 million. Interest began accruing on February 22, 2013 and is payable semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2013. The notes will mature on March 1, 2023 and are redeemable at the Company’s option at any time, in whole or in

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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 2013-1 Receivables Funding, LLC. During March 2013, the Company closed a series of term notes payable, Sierra Timeshare 2013-1 Receivables Funding LLC, in the initial principal amount of $300 million at an advance rate of 91%. These borrowings bear interest at a weighted average coupon rate of 1.77% and are secured by vacation ownership contract receivables. As of September 30, 2013, the Company had $213 million of outstanding borrowings under these term notes.

Sierra Timeshare 2013-2 Receivables Funding, LLC. During July 2013, the Company closed a series of term notes payable, Sierra Timeshare 2013-2 Receivables Funding LLC, in the initial principal amount of $325 million at an advance rate of 98%. These borrowings bear interest at a weighted average coupon rate of 2.68% and are secured by vacation ownership contract receivables. As of September 30, 2013, the Company had $294 million of outstanding borrowings under these term notes.

Revolving Credit Facility. On May 22, 2013, the Company replaced its $1.0 billion revolving credit facility with a $1.5 billion revolving credit facility that expires on July 15, 2018. This facility is subject to a facility fee of 20 basis points based on total capacity and bears interest at LIBOR plus 130 basis points on outstanding borrowings. The facility fee and interest rate are dependent upon the Company's credit ratings. The available capacity of the facility also supports the Company's commercial paper program.

Commercial Paper. On May 22, 2013, the Company increased its existing commercial paper program by $250 million to a maximum of $750 million. The maturities of the commercial paper notes will vary, but may not exceed 366 days from the date of issue. The commercial paper notes are sold at a discount from par or will bear interest at a negotiated rate. While outstanding commercial paper borrowings generally have short-term maturities, the Company classifies the outstanding borrowings as long-term debt based on its intent and ability to refinance the outstanding borrowings on a long-term basis with its revolving credit facility. As of December 31, 2012, the Company classified its outstanding commercial paper borrowings within current portion of long-term debt due to its inability to refinance, if necessary, the outstanding borrowings on a long-term basis due to restrictions contained in the prior revolving credit facility.

Sierra Timeshare Conduit Receivables Funding II, LLC. On August 29, 2013, the Company renewed its securitized timeshare receivables conduit facility for a two-year period through August 2015. The facility bears interest at variable rates based on commercial paper rates and LIBOR rates plus a spread and the capacity remained at $650 million.

Capital Lease. During the first quarter of 2013, the Company extended the lease on its Corporate headquarters. As a result of this extension, the Company classified the lease as a capital lease and recorded a capital lease obligation of $85 million with a corresponding capital lease asset which was recorded net of deferred rent. Such transaction was non-cash and as such, is excluded from both the investing and financing activities within the Company's Consolidated Statement of Cash Flows.

Other. During January 2013, the Company entered into an agreement with a third party partner whereby the partner acquired a hotel through an SPE. The SPE financed the hotel acquisition with a $115 million four-year mortgage note, provided by related parties of such partner. The note accrues interest at 4.5% and the principal and interest are payable semi-annually, commencing on July 24, 2013. In addition, $9 million of mandatorily redeemable equity of the SPE is classified as long-term debt (see Note 8 - Variable Interest Entities for more detailed information).

Fair Value Hedges. During the third quarter of 2013, the Company entered into fixed to variable interest rate swap agreements with notional amounts of $400 million of its 3.90% senior unsecured notes and $100 million of its 4.25% senior unsecured notes. As a result of such interest rate swap agreements, the fixed interest rates on these notes were effectively modified to a variable LIBOR-based index. As of September 30, 2013, the variable interest rates were 2.36% and 2.27% for the 3.90% and 4.25% senior unsecured notes, respectively.

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.

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Concurrent with the issuance of its convertible notes, the Company entered into warrant transactions (“Warrants”) with certain counterparties. The Warrants were separate contracts entered into by the Company and were not part of its convertible notes. During the third quarter of 2012, the Company net share settled all of the outstanding warrants by issuing 613,000 shares of its common stock. As of September 30, 2012, there were no warrants outstanding.

Early Extinguishment of Debt

During the first quarter of 2013, the Company repurchased a portion of its 5.75% and 7.375% senior unsecured notes totaling $446 million through tender offers, repurchased $42 million of its 6.00% senior unsecured notes on the open market and executed a redemption option for the remaining $43 million outstanding on its 9.875% senior unsecured notes. As a result, the Company repurchased a total of $531 million of its outstanding senior unsecured notes and incurred expenses of $111 million during the nine months ended September 30, 2013, which is included within early extinguishment of debt on the Consolidated Statement of Income.

During the first quarter of 2012, the Company repurchased a portion of its 9.875% and 6.00% senior unsecured notes through tender offers totaling $650 million. In connection with these tender offers, the Company incurred expenses of $2 million and $108 million during the three and nine months ended September 30, 2012, which is included within early extinguishment of debt on the Consolidated Statement of Income.

Maturities and Capacity

The Company’s outstanding debt as of September 30, 2013 matures as follows:



	Securitized Vacation Ownership Debt		Long-Term Debt		Total
Within 1 year	$	186	$	55	$	241
Between 1 and 2 years	205		45		250
Between 2 and 3 years	419		44		463
Between 3 and 4 years	191		648		839
Between 4 and 5 years	183		714		897
Thereafter	704		1,437		2,141
	$	1,888	$	2,943	$	4,831

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 obligors of such vacation ownership contract receivables.

As of September 30, 2013, available capacity under the Company’s borrowing arrangements was as follows:



	Securitized Bank Conduit Facility^(a)		Revolving Credit Facility
Total Capacity	$	650	$	1,500
Less: Outstanding Borrowings	273		74
Letters of credit	—		9
Commercial paper borrowings	—		164		^(b)
Available Capacity	$	377	$	1,253


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


^(b)	The Company considers outstanding borrowings under its commercial paper program to be a reduction of the available capacity of its revolving credit facility.

Interest Expense

The Company incurred non-securitized interest expense of $31 million and $97 million during the three and nine months ended September 30, 2013, respectively. Such amounts consisted of $32 million and $100 million of interest primarily on long-term debt (which includes a $1 million gain related to ineffectiveness in the fair value hedges), partially offset by $1

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million and $3 million of capitalized interest during the three and nine months ended September 30, 2013, respectively, and are recorded within interest expense on the Consolidated Statements of Income. Cash paid related to interest on the Company's non-securitized debt was $112 million during the nine months ended September 30, 2013.

The Company incurred non-securitized interest expense of $32 million and $98 million during the three and nine months ended September 30, 2012, respectively. Such amounts consisted of $33 million and $102 million of interest primarily on long-term debt, partially offset by $1 million and $4 million of capitalized interest during the three and nine months ended September 30, 2012, respectively, and are recorded within interest expense on the Consolidated Statements of Income. Cash paid related to interest on the Company's non-securitized debt was $104 million during the nine months ended September 30, 2012.

Interest expense incurred in connection with the Company's securitized vacation ownership debt during the three and nine months ended September 30, 2013 was $19 million and $60 million, respectively, and $23 million and $69 million during the three and nine months ended September 30, 2012, respectively, and is recorded within consumer financing interest on the Consolidated Statements of Income. Cash paid related to such interest was $47 million and $56 million during the nine months ended September 30, 2013 and 2012, respectively.


8.	Variable Interest Entities

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

Vacation Ownership Contract Receivables Securitizations

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

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



	September 30, 2013		December 31, 2012
Securitized contract receivables, gross ^(a)	$	2,187	$	2,401
Securitized restricted cash ^(b)	101		121
Interest receivables on securitized contract receivables ^(c)	16		19
Other assets ^(d)	2		2
Total SPE assets ^(e)	2,306		2,543
Securitized term notes ^(f)	1,615		1,770
Securitized conduit facilities ^(f)	273		190
Other liabilities ^(g)	2		5
Total SPE liabilities	1,890		1,965
SPE assets in excess of SPE liabilities	$	416	$	578


^(a)	Included in current ($223 million and $252 million as of September 30, 2013 and December 31, 2012, respectively) and non-current ($1,964 million and $2,149 million as of September 30, 2013 and December 31, 2012, respectively) vacation ownership contract receivables on the Consolidated Balance Sheets.


^(b)	Included in other current assets ($66 million and $65 million as of September 30, 2013 and December 31, 2012, respectively) and other non-current assets ($35 million and $56 million as of September 30, 2013 and December 31, 2012, 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 $28 million as of both September 30, 2013 and December 31, 2012 related to securitized debt.


^(f)	Included in current ($186 million and $218 million as of September 30, 2013 and December 31, 2012, respectively) and long-term ($1,702 million and $1,742 million as of September 30, 2013 and December 31, 2012, 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 as of both September 30, 2013 and December 31, 2012) and other non-current liabilities ($3 million as of December 31, 2012) on the Consolidated Balance Sheets.

In addition, the Company has vacation ownership contract receivables that have not been securitized through bankruptcy-remote SPEs. Such gross receivables were $1,129 million and $985 million as of September 30, 2013 and December 31, 2012, 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:



	September 30, 2013		December 31, 2012
SPE assets in excess of SPE liabilities	$	416	$	578
Non-securitized contract receivables	1,129		985
Less: Allowance for loan losses	561		497
Total, net	$	984	$	1,066

In addition to restricted cash related to securitizations, the Company had $61 million and $56 million of restricted cash related to escrow deposits as of September 30, 2013 and December 31, 2012, respectively, which are recorded within other current assets on the Consolidated Balance Sheets.

Vacation Ownership NYC Property

During January 2013, the Company entered into an agreement with a third party partner whereby the partner acquired the Alex hotel in New York City through an SPE. The Company is managing and operating the hotel while the Company converts it into VOI inventory. The SPE financed the hotel acquisition and planned renovations with a $115 million four-year mortgage note and $9 million of mandatorily redeemable equity provided by related parties of such partner. The Company has committed to purchase such VOI inventory from the SPE over a four year period in the amount of $146 million, of which $124 million will be used to repay the four-year mortgage note and the mandatorily redeemable equity of the SPE. The Company is considered to be the primary beneficiary of the SPE and therefore the Company consolidated the SPE within its financial statements.

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The assets and liabilities of the SPE are as follows:



	September 30, 2013
Cash	$	4
Property and equipment, net	112
Total SPE assets	116
Accrued expenses and other current liabilities	1
Long-term debt ^(*)	107
Total SPE liabilities	108
SPE assets in excess of SPE liabilities	$	8


^(*)	Includes $99 million and $8 million of a four-year mortgage note and mandatorily redeemable equity, respectively, of which $30 million is included in current portion of long-term debt on the Consolidated Balance Sheet.


9.	Fair Value

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

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

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

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

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

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



	As of						As of
	September 30, 2013						December 31, 2012
	Fair Value		Level 2		Level 3		Fair Value		Level 2		Level 3
Assets
Derivatives: ^(a)
Interest rate contracts	$	3	$	3	$	—	$	2	$	2	$	—
Foreign exchange contracts	4		4		—		1		1		—
Securities available-for-sale ^(b)	6		—		6		6		—		6
Total assets	$	13	$	7	$	6	$	9	$	3	$	6
Liabilities
Derivatives: ^(c)
Interest rate contracts	$	2	$	2	$	—	$	3	$	3	$	—
Foreign exchange contracts	1		1		—		1		1		—
Total liabilities	$	3	$	3	$	—	$	4	$	4	$	—


^(a)	Included in other current assets ($5 million and $1 million as of September 30, 2013 and December 31, 2012, respectively) and other non-current assets ($2 million as of both September 30, 2013 and December 31, 2012) 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; carrying value is equal to estimated fair value.


^(c)	Included in accrued expenses and other current liabilities ($1 million as of both September 30, 2013 and December 31, 2012) and other non-current liabilities ($2 million and $3 million as of September 30, 2013 and December 31, 2012, respectively) on the Consolidated Balance Sheets; carrying value is equal to estimated fair value.

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

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, 2013				December 31, 2012
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets
Vacation ownership contract receivables, net	$	2,755	$	3,326	$	2,889	$	3,391
Debt
Total debt	4,831		4,898		4,562		4,811

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.

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


10.	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 AOCI to earnings over the next 12 months is not material. The impact of the freestanding foreign currency forward contracts resulted in a gain of $8 million and $6 million during the three and nine months ended September 30, 2013, respectively, and such gains were included in operating expenses on the Company’s Consolidated Statements of Income. The impact of the freestanding foreign currency forward contracts was not material to the Company’s Consolidated Statements of Income during the three and nine months ended September 30, 2012.

Interest Rate Risk

A portion of the debt used to finance the Company’s operations is exposed to interest rate fluctuations. The Company uses various hedging strategies and derivative financial instruments to create a desired mix of fixed and floating rate assets and liabilities. Derivative instruments currently used in these hedging strategies include swaps and interest rate caps. The derivatives used to manage the risk associated with the Company’s floating rate debt include freestanding derivatives and derivatives designated as cash flow hedges. The Company also uses swaps to convert specific fixed-rate debt into variable-rate debt (i.e., fair value hedges) to manage the overall interest cost. For relationships designated as fair value hedges, changes in the fair value of the derivatives are recorded in income with offsetting adjustments to the carrying amount of the hedged debt. The amount of losses that the Company expects to reclassify from AOCI to earnings during the next 12 months is not material. The impact of the freestanding derivatives was not material to the Company’s Consolidated Statements of Income during the three and nine months ended September 30, 2013 and 2012.

Gains or losses recognized in AOCI for both the three and nine months ended September 30, 2013 and 2012 were not material.


11.	Income Taxes

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

The Company’s effective tax rate declined from 37.9% during the three months ended September 30, 2012 to 36.8% during the three months ended September 30, 2013 primarily due to the release of a reserve resulting from the expiration of certain statutes of limitation.

The Company’s effective tax rate declined from 37.0% during the nine months ended September 30, 2012 to 36.7% during the nine months ended September 30, 2013.

The Company made cash income tax payments, net of refunds, of $134 million and $105 million during the nine months ended September 30, 2013 and 2012, respectively.

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12.	Commitments and Contingencies

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

Wyndham Worldwide Corporation Litigation

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

On June 26, 2012, the U.S. Federal Trade Commission ("FTC") filed a lawsuit in Federal District Court for the District of Arizona against the Company and its subsidiaries, Wyndham Hotel Group, LLC, 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 believe that the data breach incidents were material, nor does it expect that the outcome of the FTC litigation will have a material effect on the Company's results of operations, financial position or cash flows. On March 26, 2013, the Company's motion to transfer venue of the lawsuit from Arizona to the Federal District Court for the District of New Jersey was granted. The Company has filed motions to dismiss the FTC's lawsuit, which are pending before the court. The Company is unable at this time to estimate any loss or range of reasonably possible loss.

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

The Company believes that it has adequately accrued for such matters with reserves of $32 million and $42 million as of September 30, 2013 and December 31, 2012, respectively. Such reserve is exclusive of matters relating to the Company’s separation. For matters not requiring accrual, the Company believes that such matters will not have a material effect on its results of operations, financial position or cash flows based on information currently available. However, litigation is inherently unpredictable and, although the Company believes that its accruals are adequate and/or that it has valid defenses in these matters, unfavorable results could occur. As such, an adverse outcome from such proceedings for which claims are awarded in excess of the amounts accrued, if any, could be material to the Company with respect to earnings and/or cash flows in any given reporting period. As of September 30, 2013, the potential exposure resulting from adverse outcomes of such legal proceedings could, in the aggregate, range up to approximately $13 million in excess of recorded accruals. However, the Company does not believe that the impact of such litigation should result in a material liability to the Company in relation to its consolidated financial position or liquidity.

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Other Guarantees/Indemnifications

Lodging

From time to time, the Company may enter into a hotel management agreement that provides the hotel owner with a guarantee of a certain level of profitability based upon various metrics. Under such an agreement, the Company would be required to compensate such hotel owner for any profitability shortfall over the life of the management agreement up to a specified aggregate amount. For certain agreements, the Company may be able to recapture all or a portion of the shortfall payments in the event that future operating results exceed targets. The terms of such guarantees generally range from 7 to 10 years and certain agreements may provide for early termination provisions under certain circumstances. As of September 30, 2013, the maximum potential amount of future payments that may be made under these guarantees was $136 million with a combined annual cap of $39 million.

In connection with such performance guarantees, as of September 30, 2013, the Company maintained a liability of $39 million, of which $36 million was included in other non-current liabilities and $3 million was included in accrued expenses and other current liabilities on its Consolidated Balance Sheet. As of September 30, 2013, the Company also had a corresponding $44 million asset related to these guarantees, of which $40 million was included in other non-current assets and $4 million was included in other current assets on its Consolidated Balance Sheet. Such assets are being amortized on a straight-line basis over the life of the agreements. The amortization expense for the performance guarantees noted above was $1 million and $2 million for the three and nine months ended September 30, 2013, respectively.

Under such performance guarantees, the Company also had receivables of $18 million and $5 million as of September 30, 2013 and December 31, 2012, respectively, resulting from payments made to date which are subject to recapture and which the Company believes will be recoverable from future operating performance. Such receivables were included in other non-current assets on the Company's Consolidated Balance Sheets.

Vacation Ownership

The Company guarantees its vacation ownership subsidiary's obligation to repurchase completed property in Las Vegas, Nevada from a third party developer subject to the property meeting the Company's vacation ownership resort standards and provided that the third party developer has not sold the property to another party. The maximum potential future payments that the Company could be required to make under this commitment was $309 million as of September 30, 2013.

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.


13.	Accumulated Other Comprehensive Income

The components of AOCI are as follows:



	Foreign			Unrealized			Defined
	Currency			Gains/(Losses)			Benefit
	Translation			on Cash Flow			Pension
Pretax	Adjustments			Hedges			Plans			AOCI
Balance, December 31, 2012	$	137		$	(9	)	$	(8	)	$	120
Period change	(28		)	2			—			(26		)
Balance, September 30, 2013	$	109		$	(7	)	$	(8	)	$	94

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	Foreign		Unrealized			Defined
	Currency		Gains/(Losses)			Benefit
	Translation		on Cash Flow			Pension
Tax	Adjustments		Hedges			Plans		AOCI
Balance, December 31, 2012	$	25	$	4		$	2	$	31
Period change	—		(1		)	—		(1		)
Balance, September 30, 2013	$	25	$	3		$	2	$	30

Foreign

Unrealized

Defined

Currency

Gains/(Losses)

Benefit

Translation

on Cash Flow

Pension

Net of Tax

Adjustments

Hedges

Plans