XNYS:WYN Wyndham Worldwide Corp Quarterly Report 10-Q Filing - 9/30/2012

Effective Date 9/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
OR
¨
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 140,266,725 shares as of September 30, 2012.




Table of Contents

 
 
Page
PART I
FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
 
Item 2.
 
Item 3.
Item 4.
PART II
OTHER INFORMATION
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 




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 September 30, 2012, the related consolidated statements of income and comprehensive income for the three-month and nine-month periods ended September 30, 2012 and 2011 and the related consolidated statements of cash flows and equity for the nine-month periods ended September 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
October 24, 2012



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


 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Net revenues
 
 
 
 
 
 
 
Service and membership fees
$
566

 
$
584

 
$
1,558

 
$
1,579

Vacation ownership interest sales
373

 
320

 
987

 
855

Franchise fees
168

 
160

 
449

 
395

Consumer financing
106

 
105

 
311

 
310

Other
52

 
43

 
135

 
114

Net revenues
1,265

 
1,212

 
3,440

 
3,253


Expenses
 
 
 
 
 
 
 
Operating
495

 
490

 
1,389

 
1,358

Cost of vacation ownership interests
45

 
35

 
115

 
115

Consumer financing interest
23

 
21

 
69

 
67

Marketing and reservation
197

 
182

 
554

 
472

General and administrative
172

 
157

 
481

 
422

Asset impairment

 

 

 
13

Restructuring

 

 

 
6

Depreciation and amortization
45

 
43

 
136

 
133

Total expenses
977

 
928

 
2,744

 
2,586


Operating income
288

 
284

 
696

 
667

Other income, net

 
(2
)
 
(9
)
 
(9
)
Interest expense
32

 
34

 
98

 
103

Early extinguishment of debt
2

 

 
108

 
12

Interest income
(2
)
 
(19
)
 
(7
)
 
(22
)

Income before income taxes
256

 
271

 
506

 
583

Provision for income taxes
97

 
96

 
187

 
222


Net income
159

 
175

 
319

 
361

Net loss attributable to noncontrolling interest

 

 
1

 

Net income attributable to Wyndham shareholders
$
159

 
$
175

 
$
320

 
$
361


Earnings per share
 
 
 
 
 
 
 
Basic
$
1.13

 
$
1.10

 
$
2.20

 
$
2.17

Diluted
1.11

 
1.08

 
2.16

 
2.12

 
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.23

 
$
0.15

 
$
0.69

 
$
0.45



See Notes to Consolidated Financial Statements.
2

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


 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Net income
$
159

 
$
175

 
$
319

 
$
361

Other comprehensive income/(loss), net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustments
19

 
(53
)
 
12

 
(25
)
Unrealized gain on cash flow hedges
1

 
1

 
4

 
3

Other comprehensive income/(loss), net of tax
20

 
(52
)
 
16

 
(22
)
Comprehensive income
179

 
123

 
335

 
339

Net loss attributable to noncontrolling interest

 

 
1

 

Comprehensive income attributable to Wyndham shareholders
$
179

 
$
123

 
$
336

 
$
339



See Notes to Consolidated Financial Statements.
3

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


 
September 30,
2012
 
December 31,
2011
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
232

 
$
142

Trade receivables, net
376

 
409

Vacation ownership contract receivables, net
320

 
297

Inventory
372

 
351

Prepaid expenses
107

 
121

Deferred income taxes
160

 
153

Other current assets
262

 
257

Total current assets
1,829

 
1,730

Long-term vacation ownership contract receivables, net
2,590

 
2,551

Non-current inventory
725

 
759

Property and equipment, net
1,166

 
1,117

Goodwill
1,537

 
1,479

Trademarks, net
737

 
730

Franchise agreements and other intangibles, net
451

 
401

Other non-current assets
320

 
256

Total assets
$
9,355

 
$
9,023

Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Securitized vacation ownership debt
$
206

 
$
196

Current portion of long-term debt
64

 
46

Accounts payable
272

 
278

Deferred income
389

 
402

Due to former Parent and subsidiaries
12

 
10

Accrued expenses and other current liabilities
665

 
631

Total current liabilities
1,608

 
1,563

Long-term securitized vacation ownership debt
1,716

 
1,666

Long-term debt
2,465

 
2,107

Deferred income taxes
1,122

 
1,065

Deferred income
186

 
182

Due to former Parent and subsidiaries
29

 
37

Other non-current liabilities
210

 
171

Total liabilities
7,336

 
6,791

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 215,159,866 shares in 2012 and 212,286,217 shares in 2011
2

 
2

Treasury stock, at cost – 74,602,746 shares in 2012 and 65,228,133 shares in 2011
(2,450
)
 
(2,009
)
Additional paid-in capital
3,814

 
3,818

Retained earnings
510

 
293

Accumulated other comprehensive income
144

 
128

Total stockholders’ equity
2,020

 
2,232

Noncontrolling interest
(1
)
 

Total equity
2,019

 
2,232

Total liabilities and equity
$
9,355

 
$
9,023


See Notes to Consolidated Financial Statements.
4

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


 
Nine Months Ended
 
September 30,
 
2012
 
2011
Operating Activities
 
 
 
Net income
$
319

 
$
361

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
136

 
133

Provision for loan losses
320

 
255

Deferred income taxes
40

 
63

Stock-based compensation
31

 
31

Excess tax benefits from stock-based compensation
(27
)
 
(17
)
Asset impairment

 
13

Loss on early extinguishment of debt
107

 
12

Non-cash interest
17

 
21

Net change in assets and liabilities, excluding the impact of acquisitions and dispositions:
 
 
 
Trade receivables
42

 
71

Vacation ownership contract receivables
(247
)
 
(151
)
Inventory
68

 
71

Prepaid expenses
19

 
(2
)
Other current assets
(12
)
 
17

Accounts payable, accrued expenses and other current liabilities
5

 
31

Due to former Parent and subsidiaries, net
(3
)
 
(14
)
Deferred income
(17
)
 
(27
)
Other, net
10

 
(8
)
Net cash provided by operating activities
808

 
860

Investing Activities
 
 
 
Property and equipment additions
(123
)
 
(153
)
Net assets acquired, net of cash acquired
(204
)
 
(27
)
Development advances
(3
)
 
(4
)
Equity investments and loans
(45
)
 
(11
)
Proceeds from asset sales

 
26

Decrease in securitization restricted cash
10

 
13

Increase in escrow deposit restricted cash
(11
)
 

Other, net
(1
)
 
(3
)
Net cash used in investing activities
(377
)
 
(159
)
Financing Activities
 
 
 
Proceeds from securitized borrowings
1,265

 
1,243

Principal payments on securitized borrowings
(1,204
)
 
(1,163
)
Proceeds from long-term debt
1,818

 
1,771

Principal payments on long-term debt
(1,793
)
 
(1,778
)
Proceeds from note issuances
941

 
245

Repurchase of notes
(757
)
 

Repayment/repurchase of convertible notes
(45
)
 
(262
)
Proceeds from call options
33

 
155

Repurchase of warrants

 
(112
)
Dividends to shareholders
(102
)
 
(76
)
Repurchase of common stock
(476
)
 
(673
)
Proceeds from stock option exercises
13

 
11

Excess tax benefits from stock-based compensation
27

 
17

Debt issuance costs
(15
)
 
(21
)
Net share settlement of incentive equity awards
(44
)
 
(30
)
Other, net
(1
)
 
(1
)
Net cash used in financing activities
(340
)
 
(674
)
Effect of changes in exchange rates on cash and cash equivalents
(1
)
 
(8
)
Net increase in cash and cash equivalents
90

 
19

Cash and cash equivalents, beginning of period
142

 
156

Cash and cash equivalents, end of period
$
232

 
$
175


See Notes to Consolidated Financial Statements.
5

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

 

 

 

 
320

 

 
(1
)
 
319

Other comprehensive income

 

 

 

 

 
16

 

 
16

Exercise of stock options

 

 

 
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



 
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

 

 

 

 
361

 

 

 
361

Other comprehensive income

 

 

 

 

 
(22
)
 

 
(22
)
Exercise of stock options

 

 

 
10

 

 

 

 
10

Issuance of shares for RSU vesting
2

 

 

 

 

 

 

 

Net share settlement of incentive equity awards

 

 

 
(30
)
 

 

 

 
(30
)
Change in deferred compensation

 

 

 
31

 

 

 

 
31

Repurchase of warrants

 

 

 
(112
)
 

 

 

 
(112
)
Repurchase of common stock
(22
)
 

 
(677
)
 

 

 

 

 
(677
)
Change in excess tax benefit on equity awards

 

 

 
17

 

 

 

 
17

Dividends

 

 

 

 
(76
)
 

 

 
(76
)
Other

 

 

 

 

 

 

 

Balance as of September 30, 2011
153

 
$
2

 
$
(1,784
)
 
$
3,808

 
$
260

 
$
133

 
$

 
$
2,419



See Notes to Consolidated Financial Statements.
6


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 and 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
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.

7


Intangibles-Goodwill and Other. In July 2012, the FASB issued guidance on the testing of indefinite-lived intangible assets for impairment, which is intended to reduce the cost and complexity of the impairment test for indefinite-lived intangible assets by providing an entity with the option to first assess qualitatively whether it is necessary to perform the impairment test that is currently in place. An entity would not be required to quantitatively calculate the fair value of an indefinite-lived intangible asset unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. This guidance is effective for interim and annual impairment tests beginning after September 15, 2012, with early adoption permitted. The Company will adopt the guidance on October 1, 2012, as required, and it believes the adoption of this guidance will not have a 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.
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,
 
 
2012
 
2011
 
2012
 
2011
 
Net income attributable to Wyndham shareholders
$
159

 
$
175

 
$
320

 
$
361

 
Basic weighted average shares outstanding
141

 
159

 
145

 
166

 
Stock options, SSARs and RSUs (a)
2

 
3

(c) 
2

 
3

(c) 
Warrants (b)
1

 

 
1

 
1

 
Diluted weighted average shares outstanding
144

(d) 
162

(e) 
148

(d) 
170

(e) 
Earnings per share:
 
 
 
 
 
 
 
 
Basic
$
1.13

 
$
1.10

 
$
2.20

 
$
2.17

 
Diluted
1.11

 
1.08

 
2.16

 
2.12

 

(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 3 million stock options and stock-settled stock appreciation rights ("SSARs") for both the three and nine months ended September 30, 2011, as it would have been anti-dilutive to EPS.
(d) 
Excludes 607,000 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 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). During each of the quarterly periods ended March 31, June 30 and September 30, 2011, the Company paid cash dividends of $0.15 per share ($76 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 nine months ended September 30, 2012
10.0

 
473

 
47.35

As of September 30, 2012
50.1

 
$
1,670

 
33.33

The Company had $658 million remaining availability in its program as of September 30, 2012. The total capacity of this program will increase by proceeds received from any future stock option exercises.


8


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.

Shell Vacations, LLC. On September 13, 2012, the Company completed the acquisition of Shell Vacations, LLC and its subsidiaries ("Shell"), a U.S. vacation ownership club and property management business. Management believes this acquisition strengthens the Company's vacation ownership portfolio and enhances its fee-for-service business model. The preliminary allocation of the purchase price is summarized as follows:
 
Amount
Cash consideration
$
180

Less: cash acquired
6

Net cash consideration
174

Fair value of assets acquired in excess of liabilities assumed
148

Excess purchase price over fair value of assets acquired and liabilities assumed
$
26


The net cash consideration of $174 million is comprised of $96 million (net of cash acquired) for the equity of Shell and $78 million related to debt secured with VOI contract receivables repaid at closing. In addition, the Company assumed $79 million of debt. Acquisition-related costs in the amount of $1 million are included in general and administrative expenses in the accompanying Consolidated Statements of Income for three and nine month periods ended September 30, 2012.


9


The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed in connection with the Company's acquisition of Shell and is subject to revision upon receipt of final information:
 
Amount
Vacation ownership contracts receivables
$
128

Inventory
41

Customer relationships (a)
35

Trademarks (b)
4

Management contracts (c)
20

Goodwill
26

Property and equipment
22

Other current and non-current assets
35

Total assets acquired
311

Other current liabilities
43

Assumed debt
79

Other non-current liabilities
9

Total liabilities assumed
131

Net assets acquired
$
180

 
(a) 
Represents customer relationships with a weighted average life of 15 years; included within Franchise agreements and other intangibles, net on the Consolidated Balance Sheet.
(b)     Represents trademarks with a weighted average life of 15 years.
(c) 
Represents management contracts with a weighted average life of 15 years; included within Franchise agreements and other intangibles, net on the Consolidated Balance Sheet.

The goodwill, all of which is expected to be deductible for tax purposes, was assigned to the Company's Vacation Ownership segment. This acquisition was not material to the Company's results of operations, financial position or cash flows.

Smoky Mountain Property Management Group. On August 1, 2012, the Company completed the acquisition of Smoky Mountain Property Management Group ("Smoky Mountain"), a U.S. vacation rental business, for $30 million in cash, net of cash acquired. The preliminary purchase price allocation resulted in the recognition of $24 million of goodwill and $15 million of definite-lived intangible assets with a weighted average life of 12 years, all of which were assigned to the Company's Vacation Exchange and Rentals segment. This acquisition is consistent with the Company's strategy to grow its fee-for-service U.S. rentals business. This acquisition was not material to the Company's results of operations, financial position or cash flows.

Equity Investment. During 2012, the Company invested $41 million in cash and recorded $9 million of contingent consideration related to a joint venture that owns a Wyndham branded hotel. This investment was not material to the Company's results of operations, financial position or cash flows.



10


4.
Intangible Assets
Intangible assets consisted of:
 
As of September 30, 2012
 
As of December 31, 2011
 
Gross
 
 
 
Net
 
Gross
 
 
 
Net
 
Carrying
 
Accumulated
 
Carrying
 
Carrying
 
Accumulated
 
Carrying
 
Amount
 
Amortization
 
Amount
 
Amount
 
Amortization
 
Amount
Unamortized Intangible Assets:
 
 
 
 
 
 
 
 
 
 
 
Goodwill
$
1,537

 
 
 
 
 
$
1,479

 
 
 
 
Trademarks
$
737

 
 
 
 
 
$
730

 
 
 
 
Amortized Intangible Assets:
 
 
 
 
 
 
 
 
 
 
 
Franchise agreements
$
595

 
$
337

 
$
258

 
$
595

 
$
324

 
$
271

Other
252

 
59

 
193

 
180

 
50

 
130

 
$
847

 
$
396

 
$
451

 
$
775

 
$
374

 
$
401


The changes in the carrying amount of goodwill are as follows:
 
 
 
Goodwill
 
 
 
 
 
Balance at
 
Acquired
 
Foreign
 
Balance at
 
December 31, 2011
 
During 2012 (*)
 
Exchange
 
September 30, 2012
Lodging
$
300

 
$

 
$

 
$
300

Vacation Exchange and Rentals
1,179

 
24

 
8

 
1,211

Vacation Ownership

 
26

 

 
26

Total Company
$
1,479

 
$
50

 
$
8

 
$
1,537

 
(*) Relates to acquisitions completed during the third quarter of 2012 (see Note 3 - Acquisitions).

Amortization expense relating to amortizable intangible assets was as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Franchise agreements
$
4

 
$
5

 
$
13

 
$
15

Other
3

 
3

 
9

 
9

Total (*)
$
7

 
$
8

 
$
22

 
$
24

 
(*) 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, 2012, the Company expects related amortization expense as follows:
 
Amount
Remainder of 2012
$
8

2013
33

2014
32

2015
32

2016
31

2017
30




11


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,
2012
 
December 31,
2011
Current vacation ownership contract receivables:
 
 
 
Securitized
$
248

 
$
262

Non-securitized
123

 (a) 
76

 
371

 
338

Less: Allowance for loan losses
51

 
41

Current vacation ownership contract receivables, net
$
320

 
$
297

Long-term vacation ownership contract receivables:
 
 
 
Securitized
$
2,128

 
$
2,223

Non-securitized
897

 (a) 
681

 
3,025

 
2,904

Less: Allowance for loan losses
435

 
353

Long-term vacation ownership contract receivables, net
$
2,590

 
$
2,551

 
(a) Includes $26 million and $100 million of current and long-term vacation ownership contract receivables, respectively, related to Shell.
During the three and nine months ended September 30, 2012, the Company’s securitized vacation ownership contract receivables generated interest income of $76 million and $229 million, respectively. During the three and nine months ended September 30, 2011, such amounts were $79 million and $244 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 nine months ended September 30, 2012 and 2011, the Company originated vacation ownership contract receivables of $822 million and $730 million, respectively, and received principal collections of $575 million and $579 million, respectively. The weighted average interest rate on outstanding vacation ownership contract receivables was 13.4% and 13.3% at September 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
320

Contract receivables write-offs, net
(228
)
Allowance for loan losses as of September 30, 2012
$
486


 
Amount
Allowance for loan losses as of December 31, 2010
$
362

Provision for loan losses
255

Contract receivables write-offs, net
(232
)
Allowance for loan losses as of September 30, 2011
$
385

In accordance with the guidance for accounting for real estate timesharing transactions, the Company recorded a provision for loan losses of $124 million and $320 million as a reduction of net revenues during the three and nine months ended September 30, 2012, respectively, and $96 million and $255 million during the three and nine months ended September 30, 2011, respectively.

12


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 300850 and are calculated based on information obtained from one or more of the three major U.S. credit reporting agencies that compile and report on a consumer’s credit history. The Company updates its records for all active VOI contract receivables with a balance due on a rolling monthly basis 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, 2012
 
700+
 
600-699
 
<600
 
No Score
 
Asia Pacific
 
Total
Current
$
1,459

 
$
1,068

 
$
290

 
$
90

 
$
311

 
$
3,218

31 - 60 days
13

 
24

 
24

 
3

 
5

 
69

61 - 90 days
8

 
12

 
15

 
1

 
2

 
38

91 - 120 days
14

 
32

 
21

 
2

 
2

 
71

Total
$
1,494

 
$
1,136

 
$
350

 
$
96

 
$
320

 
$
3,396

 
 
 
 
 
 
 
 
 
 
 
 
 
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.

13


6.   Inventory
Inventory consisted of:
 
September 30,
2012
 
December 31,
2011
Land held for VOI development
$
137

 
$
136

VOI construction in process
171

 
149

Completed inventory and vacation credits (a)(b)
789

 
825

Total inventory
1,097

(c) 
1,110

Less: Current portion
372

 
351

Non-current inventory
$
725

 
$
759

 
(a) 
Includes estimated recoveries of $198 million and $164 million as of September 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 September 30, 2012 and December 31, 2011, respectively, related to the Company’s vacation exchange and rentals business.
(c) 
Includes $41 million related to Shell.
Inventory that the Company expects to sell within the next twelve months is classified as current on the Consolidated Balance Sheets.

7.
Long-Term Debt and Borrowing Arrangements
The Company’s indebtedness consisted of:
 
September 30,
2012
 
December 31,
2011
 
Securitized vacation ownership debt: (a)
 
 
 
 
Term notes
$
1,702

 
$
1,625

 
       Bank conduit facility
220

 
237

 
Total securitized vacation ownership debt
1,922

 
1,862

 
Less: Current portion of securitized vacation ownership debt
206

 
196

 
Long-term securitized vacation ownership debt
$
1,716

 
$
1,666

 
Long-term debt: (b)
 
 
 
 
Revolving credit facility (due July 2016)
$
270

 
$
218

 
$230 million 3.50% convertible notes (due May 2012)

 
36

 
$43 million 9.875% senior unsecured notes (due May 2014)
42

 
243

(d) 
$357 million 6.00% senior unsecured notes (due December 2016)
361

(c) 
811

(e) 
$300 million 2.95% senior unsecured notes (due March 2017)
298

 

 
$250 million 5.75% senior unsecured notes (due February 2018)
248

 
247

 
$250 million 7.375% senior unsecured notes (due March 2020)
248

 
247

 
$250 million 5.625% senior unsecured notes (due March 2021)
246

 
245

 
$650 million 4.25% senior unsecured notes (due March 2022)
644

 

 
Vacation rentals capital leases
104

 
102

 
Other
68

(f) 
4

 
Total long-term debt
2,529

 
2,153

 
Less: Current portion of long-term debt
64

 
46

 
Long-term debt
$
2,465

 
$
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 $2,517 million and $2,638 million of underlying gross vacation ownership contract receivables and related assets as of September 30, 2012 and December 31, 2011, respectively.

14


(b) 
The carrying amounts of the senior unsecured notes are net of unamortized discount of $18 million as of September 30, 2012.
(c) 
Includes $5 million of unamortized gains from the settlement of a derivative.
(d) 
Aggregate principal balance as of December 31, 2011 was $250 million.
(e) 
Aggregate principal balance as of December 31, 2011 was $800 million.
(f) 
Includes $65 million related to Shell, of which $53 million is current.
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 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 September 30, 2012, the Company had $328 million of outstanding borrowings under these term notes.
Sierra Timeshare 2012-2 Receivables Funding, LLC. During July 2012, the Company closed a series of term notes payable, Sierra Timeshare 2012-2 Receivables Funding LLC, with an initial principal amount of $300 million at an advance rate of 90%. These borrowings bear interest at a weighted average coupon rate of 2.66% and are secured by vacation ownership contract receivables. As of September 30, 2012, the Company had $271 million of outstanding borrowings under these term notes.
Sierra Timeshare Conduit Receivables Funding II, LLC. During August 2012, the Company renewed its securitized timeshare receivables conduit facility for a two-year period through August 2014. The facility bears interest at variable rates based on commercial paper rates and LIBOR rates plus a spread and has a capacity of $650 million.
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 were separate contracts entered into by the Company and were not part of its convertible notes. During the third quarter, 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 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 $2 million and $108 million during the three and nine months ended September 30, 2012, respectively, which is included within early extinguishment of debt on the Consolidated Statements 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 $12 million during the nine months ended September 30, 2011, which is included within early extinguishment of debt on the Consolidated Statement of Income.  

15


Maturities and Capacity
The Company’s outstanding debt as of September 30, 2012 matures as follows:
 
Securitized Vacation Ownership Debt
 
Other
 
Total
Within 1 year
$
206

 
$
64

 
$
270

Between 1 and 2 years
244

 
65

 
309

Between 2 and 3 years
378

 
11

 
389

Between 3 and 4 years
204

 
281

 
485

Between 4 and 5 years
198

 
670

 
868

Thereafter
692

 
1,438

 
2,130

 
$
1,922

 
$
2,529

 
$
4,451

 
Debt maturities of the securitized vacation ownership debt are based on the contractual payment terms of the underlying vacation ownership contract receivables. As such, actual maturities may differ as a result of prepayments by the vacation ownership contract receivable obligors.
As of September 30, 2012, available capacity under the Company’s borrowing arrangements was as follows:
 
Securitized Bank Conduit Facility(a)
 
Revolving
Credit Facility
 
Total Capacity
$
650

 
$
1,000

 
Less: Outstanding Borrowings
220

 
270

 
Available Capacity
$
430

 
$
730

(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 September 30, 2012, the available capacity of $730 million was further reduced to $720 million due to the issuance of $10 million of letters of credit.
Interest Expense
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 primarily of $33 million and $102 million of interest 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.
The Company incurred non-securitized interest expense of $34 million and $103 million during the three and nine months ended September 30, 2011, respectively. Such amounts consisted primarily of $37 million and $112 million of interest on long-term debt, partially offset by $3 million and $9 million of capitalized interest during the three and nine months ended September 30, 2011, 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 $95 million during the nine months ended September 30, 2011.
Interest expense incurred in connection with the Company’s securitized vacation ownership debt during the three and nine months ended September 30, 2012 was $23 million and $69 million, respectively, and $21 million and $67 million during the three and nine months ended September 30, 2011, respectively, and is recorded within consumer financing interest on the Consolidated Statements of Income. Cash paid related to interest on the Company's securitized vacation ownership debt was $56 million and $57 million during the nine months ended September 30, 2012 and 2011, respectively.



16


8.
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.
The assets and liabilities of these vacation ownership SPEs are as follows:
 
September 30,
2012
 
December 31,
2011
Securitized contract receivables, gross (a)
$
2,376

 
$
2,485

Securitized restricted cash (b)
122

 
132

Interest receivables on securitized contract receivables (c)
19

 
20

Other assets (d)

 
1

Total SPE assets (e)
2,517

 
2,638

Securitized term notes (f)
1,702

 
1,625

Securitized conduit facilities (f)
220

 
237

Other liabilities (g)
6

 
11

Total SPE liabilities
1,928

 
1,873

SPE assets in excess of SPE liabilities
$
589

 
$
765

 
(a) 
Included in current ($248 million and $262 million as of September 30, 2012 and December 31, 2011, respectively) and non-current ($2,128 million and $2,223 million as of September 30, 2012 and December 31, 2011, respectively) vacation ownership contract receivables on the Consolidated Balance Sheets.
(b) 
Included in other current assets ($65 million and $71 million as of September 30, 2012 and December 31, 2011, respectively) and other non-current assets ($57 million and $61 million as of September 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 $28 million and $26 million as of September 30, 2012 and December 31, 2011, respectively, related to securitized debt.
(f) 
Included in current ($206 million and $196 million as of September 30, 2012 and December 31, 2011, respectively) and long-term ($1,716 million and $1,666 million as of September 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 as of both September 30, 2012 and December 31, 2011) and other non-current liabilities ($4 million and $9 million as of September 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 $1,020 million and $757 million as of September 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:
 
September 30,
2012
 
December 31,
2011
SPE assets in excess of SPE liabilities
$
589

 
$
765

Non-securitized contract receivables
1,020

 
757

Less: Allowance for loan losses
486

 
394

Total, net
$
1,123

 
$
1,128


17


Restricted Cash
In addition to restricted cash related to securitizations, the Company also had $64 million and $53 million of restricted cash related to escrow deposits as of September 30, 2012 and December 31, 2011, respectively, which was recorded within other current assets on the Consolidated Balance Sheets.

9.
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 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
 
September 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
1

 
1

 

 
1

 
1

 

Securities available-for-sale (b)
6

 

 
6

 
6

 

 
6

Total assets
$
10

 
$
4

 
$
6

 
$
35

 
$
5

 
$
30


Liabilities
 
 
 
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
 
 
 
Bifurcated Conversion Feature (c)
$

 
$

 
$

 
$
24

 
$

 
$
24

Interest rate contracts (d)
4

 
4

 

 
10

 
10

 

Foreign exchange contracts (d)
2

 
2

 

 
3

 
3

 

Total liabilities
$
6

 
$
6

 
$

 
$
37

 
$
13

 
$
24

 
(a) 
Included in other current assets ($2 million and $25 million as of September 30, 2012 and December 31, 2011, respectively) and other non-current assets ($2 million and $4 million as of September 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 ($2 million and $4 million as of September 30, 2012 and December 31, 2011, respectively) and other non-current liabilities ($4 million and $9 million as of September 30, 2012 and December 31, 2011, respectively) on the Consolidated Balance Sheets; carrying value is equal to estimated fair value.

18


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 10 – 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.
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 September 30, 2012 and September 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 September 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
10

 
(10
)
 

Balance as of September 30, 2011
$
16

 
$
(16
)
 
$
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:
 
September 30, 2012
 
December 31, 2011
 
Carrying
Amount
 
Estimated Fair Value
 
Carrying
 Amount
 
Estimated Fair Value
Assets
 
 
 
 
 
 
 
Vacation ownership contract receivables, net
$
2,910

 
$
3,389

 
$
2,848

 
$
3,232

Debt
 
 
 
 
 
 
 
Total debt (*)
4,451

 
4,677

 
4,015

 
4,205

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

19


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.