NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise noted, all amounts are in millions, except share and per share amounts)
(Unaudited)
Wyndham Worldwide Corporation (“Wyndham” or the “Company”) is a global provider of hospitality services and products. The accompanying Condensed 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 Condensed 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 Condensed Consolidated Financial Statements.
In presenting the Condensed 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 Condensed Consolidated Financial Statements contain all normal recurring adjustments necessary for a fair presentation of interim results reported. The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire year or any subsequent interim period. These Condensed Consolidated Financial Statements should be read in conjunction with the Company’s
2016
Consolidated Financial Statements included in its Annual Report filed on Form 10-K with the Securities and Exchange Commission on
February 17, 2017
.
Business Description
The Company operates in the following business segments:
|
|
•
|
Hotel Group
—primarily franchises hotels in the upscale, upper midscale, midscale, economy and extended stay segments and provides hotel management services for full-service and select limited-service hotels.
|
|
|
•
|
Destination Network
—provides vacation exchange services and products to owners of intervals of vacation ownership interests (“VOIs”) and manages 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
Revenue from Contracts with Customers.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance on revenue from contracts with customers. The guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The guidance also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Entities have the option to apply the new guidance under a retrospective approach to each prior reporting period presented or a modified retrospective approach with the cumulative effect of initially applying the new guidance recognized at the date of initial application within the statement of financial position. The Company currently expects to adopt the new guidance utilizing the full retrospective transition method on its effective date of January 1, 2018.
The Company’s analysis to identify the impact of the new guidance is substantially complete, with the exception of its Wyndham Rewards loyalty and co-branded credit card programs which the Company is still awaiting industry clarification. The Company estimates that its net revenues and net income for the year ended 2016 would be reduced by
$5 million
to
$10 million
, which would be recognized in future years. Additionally, the Company expects a change in the seasonality of its revenues and net income primarily reflecting a shift of revenues and net income from the first quarter to the third quarter.
The Company believes the most significant impacts relating to its Hotel Group segment are the accounting for initial fees, upfront costs and marketing and reservation expenses. The Company expects royalty and marketing and reservation fees to remain substantially unchanged. Specifically, under the new guidance, the Company expects initial fees to be recognized ratably over the life of the noncancelable period of the franchise agreement and incremental upfront contract costs to be deferred and expensed over the life of the noncancelable period of the franchise agreement. Marketing and reservation revenues earned in excess of costs incurred will no longer be accrued as a liability for future marketing and reservation costs; marketing or reservation costs incurred in excess of revenues earned will continue to be expensed as incurred.
The Company believes the most significant impacts relating to its Destination Network segment are the accounting for vacation rental revenues and other vacation exchange related product fees. Specifically, under the new guidance, the Company expects (i) approximately thirty percent of its vacation rental revenue will no longer be recognized in the period that the rental reservation is booked and, instead, will be recognized over the term of the guest stay and (ii) other vacation exchange related product fees to be deferred and recognized upon the occurrence of a future vacation exchange or other transaction. The Company expects vacation exchange transaction and membership fees to remain substantially unchanged.
The Company expects the recognition of its Vacation Ownership segment revenues to remain substantially unchanged, with the exception of (i) revenue from certain travel packages utilized to market its VOI products which will be presented on a gross basis within other revenues and (ii) a reduction of property management revenues by the proportionate share of maintenance fees paid on its unsold inventory.
Leases.
In February 2016, the FASB issued guidance which requires companies generally to recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. This guidance is effective for fiscal years beginning after December 15, 2018 and for interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this guidance on its financial statements and related disclosures.
Financial Instruments - Credit Losses
. In June 2016, the FASB issued guidance which amends the guidance on measuring credit losses on financial assets held at amortized cost. The guidance requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of this guidance on its financial statements and related disclosures.
Statement of Cash Flows
. In August 2016, the FASB issued guidance intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. This guidance requires the retrospective transition method and is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The Company believes the impact of this new guidance will result in development advance notes being recorded within operating activities on its Condensed Consolidated Statement of Cash Flows.
Restricted Cash
. In November 2016, the FASB issued guidance which requires amounts generally described as restricted cash and cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The Company will adopt this new guidance on January 1, 2018, using a retrospective transition method. The Company believes the impact of the new restricted cash guidance will result in escrow deposits and restricted cash being included with cash and cash equivalents on the statement of cash flows.
The table below summarizes the effects of the new statement of cash flows and restricted cash guidance on the Company’s Condensed Consolidated Statements of Cash Flows
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|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
Increase/(decrease):
|
2017
|
|
2016
|
Operating Activities
|
$
|
(1
|
)
|
|
$
|
(3
|
)
|
Investing Activities
|
56
|
|
|
44
|
|
Cash and cash equivalents, beginning of period
|
149
|
|
|
152
|
|
Cash and cash equivalents, end of period
|
214
|
|
|
192
|
|
Intra-Entity Transfers of Assets Other Than Inventory
. In October 2016, the FASB issued guidance which requires companies to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This guidance requires the modified retrospective approach and is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this guidance on its financial statements and related disclosures.
Clarifying the Definition of a Business
. In January 2017, the FASB issued guidance clarifying the definition of a business, which assists entities when evaluating whether transactions should be accounted for as acquisitions of businesses or assets. This guidance is effective on a prospective basis for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of this guidance on its financial statements and related disclosures.
Simplifying the Test for Goodwill Impairment
. In January 2017, the FASB issued guidance which simplifies the current two-step goodwill impairment test by eliminating Step 2 of the test. The guidance requires a one-step impairment test in which an entity compares the fair value of a reporting unit with its carrying amount and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any. This guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, and should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of the adoption of this guidance on its financial statements and related disclosures.
Compensation - Stock Compensation.
In May 2017, the FASB issued guidance which provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. This guidance does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if there is a change to the value, vesting conditions, or award classification and would not be required if the changes are considered non-substantive. This guidance is effective for fiscal years beginning after December 15, 2017 and for interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this guidance on its financial statements and related disclosures.
Recently Adopted Accounting Pronouncements
Simplifying the Measurement of Inventory.
In July 2015, the FASB issued guidance related to simplifying the measurement of inventory. This guidance requires an entity to measure inventory at the lower of cost or net realizable value, which consists of the estimated selling prices in the ordinary course of business, less reasonably predictable cost of completion, disposal, and transportation. This guidance is effective prospectively for fiscal years beginning after December 15, 2016 and for interim periods within those fiscal years, with early adoption permitted. The Company adopted the guidance on January 1, 2017, as required. There was no material impact on its financial statements and related disclosures.
Compensation - Stock Compensation.
In March 2016, the FASB issued guidance
which is intended to simplify several
aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2016 and for interim periods within those fiscal years, with early adoption permitted. The Company adopted the guidance on January 1, 2017, as required. The Company elected to use the prospective transition method and as such, the excess tax benefits from stock-based compensation were presented as part of operating activities within its current period Condensed Consolidated Statement of Cash Flows. In addition, the excess tax benefit of
$2 million
and
$6 million
has been recognized within the provision for income taxes for the three and six months ended June 30, 2017, respectively, on the Condensed Consolidated Statement of Income.
The computation of basic and diluted earnings per share (“EPS”) is based on net income 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 share data):
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|
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|
|
|
|
|
|
|
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|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net income
|
$
|
78
|
|
|
$
|
156
|
|
|
$
|
219
|
|
|
$
|
251
|
|
Basic weighted average shares outstanding
|
103.8
|
|
|
111.0
|
|
|
104.5
|
|
|
111.9
|
|
Stock-settled appreciation rights (“SSARs”), RSUs
(a)
and PSUs
(b)
|
0.6
|
|
|
0.5
|
|
|
0.6
|
|
|
0.6
|
|
Diluted weighted average shares outstanding
|
104.4
|
|
|
111.5
|
|
|
105.1
|
|
|
112.5
|
|
Earnings per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.75
|
|
|
$
|
1.40
|
|
|
$
|
2.10
|
|
|
$
|
2.25
|
|
Diluted
|
0.75
|
|
|
1.39
|
|
|
2.09
|
|
|
2.23
|
|
Dividends:
|
|
|
|
|
|
|
|
Aggregate dividends paid to shareholders
|
$
|
60
|
|
|
$
|
55
|
|
|
$
|
125
|
|
|
$
|
115
|
|
|
|
(a)
|
Excludes
1.1 million
of restricted stock units (“RSUs”) for the three and six months ended
June 30, 2016
, respectively, that would have been anti-dilutive to EPS. Includes unvested dilutive RSUs which are subject to future forfeiture.
|
|
|
(b)
|
Excludes
0.7 million
and
0.6 million
of performance vested restricted stock units (“PSUs”) for the three and six months ended
June 30, 2017
, respectively, and
0.6 million
for the three and six months ended
June 30, 2016
, as the Company has not met the required performance metrics.
|
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, 2016
|
88.1
|
|
|
$
|
4,337
|
|
|
$
|
49.22
|
|
For the six months ended June 30, 2017
|
3.4
|
|
|
300
|
|
|
87.75
|
|
As of June 30, 2017
|
91.5
|
|
|
$
|
4,637
|
|
|
50.66
|
|
The Company had
$440 million
of remaining availability under its program as of
June 30, 2017
.
Assets acquired and liabilities assumed in business combinations were recorded on the Condensed 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 Condensed 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 Condensed Consolidated Statements of Income as expenses.
During the six months ended June 30, 2017, the Company completed
three
acquisitions at its Destination Network segment for
$15 million
in cash, net of cash acquired and
$1 million
of contingent consideration. The preliminary purchase price allocations resulted primarily in the recognition of (i)
$20 million
of other assets, (ii)
$8 million
of goodwill, of which is
$4 million
is expected to be deductible for tax purposes, (iii)
$4 million
of definite-lived intangible assets with a weighted
average life of
7
years, (iv)
$3 million
of trademarks and (v)
$19 million
of liabilities. These acquisitions were not material to the Company’s results of operations, financial position or cash flows.
|
|
4.
|
Vacation Ownership Contract Receivables
|
The Company generates vacation ownership contract receivables by extending financing to the purchasers of its VOIs. Current and long-term vacation ownership contract receivables, net consisted of:
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
Current vacation ownership contract receivables:
|
|
|
|
Securitized
|
$
|
226
|
|
|
$
|
235
|
|
Non-securitized
|
89
|
|
|
84
|
|
Current vacation ownership contract receivables, gross
|
315
|
|
|
319
|
|
Less: Allowance for loan losses
|
58
|
|
|
57
|
|
Current vacation ownership contract receivables, net
|
$
|
257
|
|
|
$
|
262
|
|
Long-term vacation ownership contract receivables:
|
|
|
|
Securitized
|
$
|
2,218
|
|
|
$
|
2,254
|
|
Non-securitized
|
902
|
|
|
825
|
|
Long-term vacation ownership contract receivables, gross
|
3,120
|
|
|
3,079
|
|
Less: Allowance for loan losses
|
585
|
|
|
564
|
|
Long-term vacation ownership contract receivables, net
|
$
|
2,535
|
|
|
$
|
2,515
|
|
The Company’s securitized vacation ownership contract receivables generated interest income of
$83 million
and
$166 million
during the three and six months ended
June 30, 2017
, respectively, and
$81 million
and
$164 million
during the three and six months ended
June 30, 2016
, respectively. Such interest income is included within consumer financing on the Condensed 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 Condensed Consolidated Balance Sheets. During the six months ended
June 30, 2017
and
2016
, the Company originated vacation ownership contract receivables of
$640 million
and
$556 million
, respectively, and received principal collections of
$443 million
and
$406 million
, respectively. The weighted average interest rate on outstanding vacation ownership contract receivables was
13.9%
as of both
June 30, 2017
and
December 31, 2016
.
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, 2016
|
$
|
621
|
|
Provision for loan losses
|
195
|
|
Contract receivables write-offs, net
|
(173
|
)
|
Allowance for loan losses as of June 30, 2017
|
$
|
643
|
|
|
|
|
|
|
|
Amount
|
Allowance for loan losses as of December 31, 2015
|
$
|
581
|
|
Provision for loan losses
|
153
|
|
Contract receivables write-offs, net
|
(148
|
)
|
Allowance for loan losses as of June 30, 2016
|
$
|
586
|
|
In accordance with the guidance for accounting for real estate time-sharing transactions, the Company recorded a provision for loan losses of
$110 million
and
$195 million
as a reduction of net revenues during the three and six months ended
June 30, 2017
, respectively, and
$90 million
and
$153 million
for the three and six months ended
June 30, 2016
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 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 June 30, 2017
|
|
700+
|
|
600-699
|
|
<600
|
|
No Score
|
|
Asia Pacific
|
|
Total
|
Current
|
$
|
1,747
|
|
|
$
|
1,017
|
|
|
$
|
166
|
|
|
$
|
124
|
|
|
$
|
254
|
|
|
$
|
3,308
|
|
31 - 60 days
|
14
|
|
|
23
|
|
|
16
|
|
|
4
|
|
|
2
|
|
|
59
|
|
61 - 90 days
|
9
|
|
|
12
|
|
|
10
|
|
|
2
|
|
|
1
|
|
|
34
|
|
91 - 120 days
|
7
|
|
|
12
|
|
|
12
|
|
|
2
|
|
|
1
|
|
|
34
|
|
Total
|
$
|
1,777
|
|
|
$
|
1,064
|
|
|
$
|
204
|
|
|
$
|
132
|
|
|
$
|
258
|
|
|
$
|
3,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
700+
|
|
600-699
|
|
<600
|
|
No Score
|
|
Asia Pacific
|
|
Total
|
Current
|
$
|
1,733
|
|
|
$
|
1,010
|
|
|
$
|
149
|
|
|
$
|
120
|
|
|
$
|
232
|
|
|
$
|
3,244
|
|
31 - 60 days
|
19
|
|
|
32
|
|
|
17
|
|
|
4
|
|
|
2
|
|
|
74
|
|
61 - 90 days
|
11
|
|
|
16
|
|
|
11
|
|
|
3
|
|
|
1
|
|
|
42
|
|
91 - 120 days
|
8
|
|
|
14
|
|
|
13
|
|
|
2
|
|
|
1
|
|
|
38
|
|
Total
|
$
|
1,771
|
|
|
$
|
1,072
|
|
|
$
|
190
|
|
|
$
|
129
|
|
|
$
|
236
|
|
|
$
|
3,398
|
|
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.
Inventory consisted of:
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
Land held for VOI development
|
$
|
4
|
|
|
$
|
146
|
|
VOI construction in process
|
11
|
|
|
59
|
|
Inventory sold subject to conditional repurchase
|
92
|
|
|
163
|
|
Completed VOI inventory
|
893
|
|
|
667
|
|
Estimated VOI recoveries
|
265
|
|
|
256
|
|
Destination network vacation credits and other
|
60
|
|
|
59
|
|
Total inventory
|
1,325
|
|
|
1,350
|
|
Less: Current portion
(*)
|
315
|
|
|
315
|
|
Non-current inventory
|
$
|
1,010
|
|
|
$
|
1,035
|
|
|
|
(*)
|
Represents inventory that the Company expects to sell within the next 12 months.
|
During the six months ended
June 30, 2017
and
2016
, the Company transferred
$28 million
and
$26 million
, respectively, from property and equipment to VOI inventory. In addition to the inventory obligations listed below, the Company had
$5 million
and
$8 million
of inventory accruals as of
June 30, 2017
and
December 31, 2016
, respectively, included within accounts payable on the Condensed Consolidated Balance Sheets.
During May 2017, the Company’s new leadership at its vacation ownership business performed an in-depth review of its operations, including its current development pipeline and long-term development plan. In connection with this review, the Company made a decision to no longer pursue future development at certain locations and thus performed a fair value assessment on these locations. As a result, the Company recorded a
$135 million
non-cash impairment charge primarily related to the write-down of land held for VOI development (see Note 15 - Asset Impairments and Other Charges for further details).
Inventory Sale Transactions
During
2015
and
2016
, the Company sold real property located in St. Thomas, U.S. Virgin Islands (“St. Thomas”) to a third-party developer, consisting of vacation ownership inventory. During 2013, the Company sold real property located in Las Vegas, Nevada and Avon, Colorado to a third-party developer, consisting of vacation ownership inventory and property and equipment.
The Company recognized
no
gain or loss on these sales transactions. In accordance with the agreements with the third-party developers, the Company has conditional rights and conditional obligations to repurchase the completed properties from the developers subject to the properties conforming to the Company's vacation ownership resort standards and provided that the third-party developers have not sold the properties to another party. Under the sale of real estate accounting guidance, the conditional rights and obligations of the Company constitute continuing involvement and thus the Company was unable to account for these transactions as a sale.
During
2014
, the Company acquired the property located in Avon, Colorado from the third-party developer. In connection with this acquisition, the Company had an outstanding obligation of
$21 million
as of
June 30, 2017
, of which
$11 million
was included within accrued expenses and other current liabilities and
$10 million
was included within other non-current liabilities on the Condensed Consolidated Balance Sheet. During the six months ended June 30, 2017, the Company paid
$11 million
to the third-party developer, of which
$9 million
was for vacation ownership inventory and
$2 million
was to satisfy a portion of its inventory obligation. As of
December 31, 2016
, the Company had an outstanding obligation of
$32 million
, of which
$11 million
was included within accrued expenses and other current liabilities and
$21 million
was included within other non-current liabilities on the Condensed Consolidated Balance Sheet.
In connection with the Las Vegas, Nevada and St. Thomas properties, the Company had outstanding obligations of
$144 million
as of
June 30, 2017
, of which
$71 million
was included within accrued expenses and other current liabilities and
$73 million
was included within other non-current liabilities on the Condensed Consolidated Balance Sheet. During the six months ended
June 30, 2017
, the Company paid
$54 million
to the third-party developer, of which
$32 million
was for vacation ownership inventory located in Las Vegas, Nevada and St. Thomas,
$20 million
was for its obligation under the vacation ownership inventory arrangements and
$2 million
was for accrued interest. In connection with these transactions, the Company acquired
$32 million
of inventory developed by the third-party developer during the second quarter of 2017 which will be paid during the third quarter of 2017. As of
December 31, 2016
, the Company had an outstanding obligation related to the Las Vegas, Nevada and St. Thomas properties of
$166 million
, of which
$74 million
was included within accrued expenses and other current liabilities and
$92 million
was included within other non-current liabilities on the Condensed Consolidated Balance Sheet.
The Company has guaranteed to repurchase the completed properties located in Las Vegas, Nevada and St. Thomas from the third-party developers subject to the properties meeting the Company’s vacation ownership resort standards and provided that the third-party developers have not sold the properties to another party. The maximum potential future payments that the Company could be required to make under these commitments was
$206 million
as of
June 30, 2017
.
During the second quarter of 2017, the Company acquired property located in Austin, Texas from a third-party developer. In connection with this acquisition, the Company had an outstanding obligation of
$61 million
as of June 30, 2017, of which
$30 million
was included within accrued expenses and other current liabilities and
$31 million
was included within other non-current liabilities on the Condensed Consolidated Balance Sheet.
|
|
6.
|
Long-Term Debt and Borrowing Arrangements
|
The Company’s indebtedness consisted of:
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
Securitized vacation ownership debt
:
(a)
|
|
|
|
Term notes
(b)
|
$
|
1,648
|
|
|
$
|
1,857
|
|
Bank conduit facility (due August 2018)
|
404
|
|
|
284
|
|
Total securitized vacation ownership debt
|
2,052
|
|
|
2,141
|
|
Less: Current portion of securitized vacation ownership debt
|
185
|
|
|
195
|
|
Long-term securitized vacation ownership debt
|
$
|
1,867
|
|
|
$
|
1,946
|
|
Long-term debt
:
(c)
|
|
|
|
Revolving credit facility (due July 2020)
|
$
|
9
|
|
|
$
|
14
|
|
Commercial paper
|
355
|
|
|
427
|
|
Term loan (due March 2021)
|
324
|
|
|
323
|
|
$300 million 2.95% senior unsecured notes (due March 2017)
|
—
|
|
|
300
|
|
$14 million 5.75% senior unsecured notes (due February 2018)
|
14
|
|
|
14
|
|
$450 million 2.50% senior unsecured notes (due March 2018)
|
449
|
|
|
449
|
|
$40 million 7.375% senior unsecured notes (due March 2020)
|
40
|
|
|
40
|
|
$250 million 5.625% senior unsecured notes (due March 2021)
|
248
|
|
|
248
|
|
$650 million 4.25% senior unsecured notes (due March 2022)
(d)
|
648
|
|
|
648
|
|
$400 million 3.90% senior unsecured notes (due March 2023)
(e)
|
406
|
|
|
407
|
|
$300 million 4.15% senior unsecured notes (due April 2024)
|
297
|
|
|
—
|
|
$350 million 5.10% senior unsecured notes (due October 2025)
(f)
|
339
|
|
|
338
|
|
$400 million 4.50% senior unsecured notes (due April 2027)
(g)
|
400
|
|
|
—
|
|
Capital leases
|
144
|
|
|
143
|
|
Other
|
35
|
|
|
20
|
|
Total long-term debt
|
3,708
|
|
|
3,371
|
|
Less: Current portion of long-term debt
|
41
|
|
|
34
|
|
Long-term debt
|
$
|
3,667
|
|
|
$
|
3,337
|
|
|
|
(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 (which legally are not liabilities of the Company) are collateralized by
$2,558 million
and
$2,601 million
of underlying gross vacation ownership contract receivables and related assets (which legally are not assets of the Company) as of
June 30, 2017
and
December 31, 2016
, respectively.
|
|
|
(b)
|
The carrying amounts of the term notes are net of debt issuance costs aggregating
$22 million
and
$24 million
as of
June 30, 2017
and
December 31, 2016
, respectively.
|
|
|
(c)
|
The carrying amounts of the senior unsecured notes and term loan are net of unamortized discounts of
$15 million
and
$11 million
as of
June 30, 2017
and
December 31, 2016
, respectively. The carrying amounts of the senior unsecured notes and term loan are net of debt issuance costs of
$5 million
and
$4 million
as of
June 30, 2017
and
December 31, 2016
, respectively.
|
|
|
(d)
|
Includes
$2 million
of unamortized gains from the settlement of a derivative as of both
June 30, 2017
and
December 31, 2016
, respectively.
|
|
|
(e)
|
Includes
$8 million
and
$9 million
of unamortized gains from the settlement of a derivative as of
June 30, 2017
and
December 31, 2016
, respectively.
|
|
|
(f)
|
Includes
$8 million
and
$9 million
of unamortized losses from the settlement of a derivative as of
June 30, 2017
and
December 31, 2016
, respectively.
|
|
|
(g)
|
Includes a
$4 million
increase in the carrying value resulting from a fair value hedge derivative as of
June 30, 2017
.
|
Long-Term Debt
The Company’s
$14 million
5.75%
senior unsecured notes due February 2018 and
$450 million
2.50%
senior unsecured notes due March 2018 are classified as long-term as the Company has the intent to refinance such debt on a long-term basis and the ability to do so with available capacity under its revolving credit facility.
Debt Issuances
Sierra Timeshare 2017-1 Receivables Funding, LLC.
During March 2017, the Company closed a series of term notes payable, Sierra Timeshare 2017-1 Receivables Funding, LLC, with an initial principal amount of
$350 million
, which are secured by vacation ownership contract receivables and bear interest at a weighted average coupon rate of
2.97%
. The advance rate for this transaction was
90%
. As of
June 30, 2017
, the Company had outstanding borrowings under these term notes of
$294 million
, net of debt issuance costs.
4.15% Senior Unsecured Notes
. During March 2017, the Company issued senior unsecured notes, with face value of
$300 million
and bearing interest at a rate of
4.15%
, for net proceeds of
$297 million
. The interest on the senior unsecured notes will be subject to adjustments from time to time if there are downgrades to the credit ratings assigned to the notes. Interest began accruing on March 21, 2017 and is payable semi-annually in arrears on April 1 and October 1 of each year, commencing on October 1, 2017. The notes will mature on April 1, 2024 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.
4.50% Senior Unsecured Notes.
During March 2017, the Company issued senior unsecured notes, with face value of
$400 million
and bearing interest at a rate of
4.50%
, for net proceeds of
$397 million
. The interest on the senior unsecured notes will be subject to adjustments from time to time if there are downgrades to the credit ratings assigned to the notes. Interest began accruing on March 21, 2017 and is payable semi-annually in arrears on April 1 and October 1 of each year, commencing on October 1, 2017. The notes will mature on April 1, 2027 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.
Other.
During 2015, the Company entered into an agreement with a third-party partner whereby the partner would develop and construct VOI inventory through an SPE. The SPE financed the development and construction with a four-year bank mortgage note. During the first quarter of 2017, the third-party partner met certain conditions of the agreement, which resulted in the Company committing to purchase
$51 million
of VOI inventory located in Clearwater, Florida, from the SPE over a two-year period. Such proceeds from the purchase will be used by the SPE to repay the mortgage notes. The Company is considered to be the primary beneficiary for specified assets and liabilities of the SPE and, therefore, the Company consolidated such assets and liabilities within its financial statements. As of June 30, 2017, the Company’s obligation under the notes was
$35 million
, with principal and interest payable tri-annually (see Note 7 - Variable Interest Entities for further details).
Commercial Paper
The Company maintains U.S. and European commercial paper programs with a total capacity of
$750 million
and
$500 million
, respectively. As of
June 30, 2017
, the Company had outstanding borrowings of
$355 million
at a weighted average interest rate of
1.72%
, all of which were under its U.S. commercial paper program. As of
December 31, 2016
, the Company had outstanding borrowings of
$427 million
at a weighted average interest rate of
1.36%
, all of which were under its U.S. commercial paper program. The Company considers outstanding borrowings under its commercial paper programs to be a reduction of available capacity on its revolving credit facility.
Fair Value Hedges
During the first quarter of 2017, the Company entered into pay-variable/receive-fixed interest rate swap agreements (the “Swaps”) on its
4.50%
senior unsecured notes with notional amounts of
$400 million
. The fixed interest rates on these notes were effectively modified to a variable LIBOR-based index. As of
June 30, 2017
, the variable interest rates on the notional portion of the
4.50%
senior unsecured notes were
3.39%
. The aggregate fair value of the Swaps resulted in
$3 million
of assets as of
June 30, 2017
, which were included within other non-current assets on the Condensed Consolidated Balance Sheet.
During 2013, the Company entered into pay-variable/receive-fixed interest rate swap agreements on its
3.90%
and
4.25%
senior unsecured notes with notional amounts of
$400 million
and
$100 million
, respectively. The fixed interest rates on these notes were effectively modified to a variable LIBOR-based index. During May 2015, the Company terminated the Swaps resulting in a gain of
$17 million
, which is being amortized over the remaining life of the senior unsecured notes as a reduction to interest expense on the Condensed Consolidated Statements of Income. The Company had
$10 million
and
$11 million
of deferred gains as of
June 30, 2017
and
December 31, 2016
, respectively, which are included within long-term debt on the Condensed Consolidated Balance Sheets.
Maturities and Capacity
The Company’s outstanding debt as of
June 30, 2017
matures as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitized Vacation Ownership Debt
|
|
Long-Term Debt
|
|
Total
|
Within 1 year
|
$
|
185
|
|
|
$
|
504
|
|
(*)
|
$
|
689
|
|
Between 1 and 2 years
|
259
|
|
|
34
|
|
|
293
|
|
Between 2 and 3 years
|
440
|
|
|
79
|
|
|
519
|
|
Between 3 and 4 years
|
187
|
|
|
916
|
|
|
1,103
|
|
Between 4 and 5 years
|
201
|
|
|
659
|
|
|
860
|
|
Thereafter
|
780
|
|
|
1,516
|
|
|
2,296
|
|
|
$
|
2,052
|
|
|
$
|
3,708
|
|
|
$
|
5,760
|
|
|
|
(*)
|
Includes
$463 million
of senior unsecured notes that are classified as long-term debt as the Company has the intent to refinance such debt on a long-term basis and the ability to do so with available capacity under its revolving credit facility.
|
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
June 30, 2017
, 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
|
404
|
|
|
9
|
|
|
Letters of credit
|
—
|
|
|
1
|
|
|
Commercial paper borrowings
|
—
|
|
|
355
|
|
(b)
|
Available Capacity
|
$
|
246
|
|
|
$
|
1,135
|
|
|
|
|
(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 programs to be a reduction of the available capacity of its revolving credit facility.
|
Early Extinguishment of Debt
During the first quarter of 2016, the Company redeemed the remaining portion of its
6.00%
senior unsecured notes for a total of
$327 million
. As a result, the Company incurred an
$11 million
loss during the six months ended
June 30, 2016
, which is included within early extinguishment of debt on the Condensed Consolidated Statement of Income.
Interest Expense
During the three and six months ended
June 30, 2017
, the Company incurred non-securitized interest expense of
$39 million
and
$73 million
, respectively, which primarily consisted of
$39 million
and
$74 million
of interest on long-term debt, partially offset by
less than $1 million
and
$1 million
of capitalized interest. Such amounts are included within interest expense on the Condensed Consolidated Statements of Income. Cash paid related to interest on the Company’s non-securitized debt was
$69 million
during the six months ended
June 30, 2017
.
During the three and six months ended
June 30, 2016
, the Company incurred non-securitized interest expense of
$34 million
and
$68 million
, respectfully, which primarily consisted of
$36 million
and
$71 million
of interest on long-term debt, partially offset by
$2 million
and
$3 million
of capitalized interest. Such amounts are included within interest expense on the Condensed Consolidated Statements of Income. Cash paid related to interest on the Company’s non-securitized debt was
$70 million
during the six months ended
June 30, 2016
.
Interest
expense incurred in connection with the Company’s securitized vacation ownership debt during the three and six months ended
June 30, 2017
was $
19 million
and $
37 million
, respectively, and $
19 million
and $
36 million
during the three and six months ended
June 30, 2016
, respectively, and is recorded within consumer financing interest on the Condensed Consolidated Statements of Income. Cash paid related to such interest was
$25 million
for the six months ended
June 30, 2017
and
2016
.
|
|
7.
|
Variable Interest Entities
|
In accordance with the applicable accounting guidance for the consolidation of a variable interest entity (“VIE”), the Company analyzes its variable interests, including loans, guarantees, 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 its 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 non-recourse debt that is securitized through the SPEs is legally not a liability of the Company and thus, the creditors have no recourse to the Company for principal and interest.
The assets and liabilities of these vacation ownership SPEs are as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
Securitized contract receivables, gross
(a)
|
$
|
2,444
|
|
|
$
|
2,489
|
|
Securitized restricted cash
(b)
|
95
|
|
|
90
|
|
Interest receivables on securitized contract receivables
(c)
|
19
|
|
|
21
|
|
Other assets
(d)
|
2
|
|
|
4
|
|
Total SPE assets
|
2,560
|
|
|
2,604
|
|
Securitized term notes
(e) (f)
|
1,648
|
|
|
1,857
|
|
Securitized conduit facilities
(e)
|
404
|
|
|
284
|
|
Other liabilities
(g)
|
1
|
|
|
2
|
|
Total SPE liabilities
|
2,053
|
|
|
2,143
|
|
SPE assets in excess of SPE liabilities
|
$
|
507
|
|
|
$
|
461
|
|
|
|
(a)
|
Included in current (
$226 million
and
$235 million
as of
June 30, 2017
and
December 31, 2016
, respectively) and non-current (
$2,218 million
and
$2,254 million
as of
June 30, 2017
and
December 31, 2016
, respectively) vacation ownership contract receivables on the Condensed Consolidated Balance Sheets.
|
|
|
(b)
|
Included in other current assets (
$78 million
and
$75 million
as of
June 30, 2017
and
December 31, 2016
, respectively) and other non-current assets (
$17 million
and
$15 million
as of
June 30, 2017
and
December 31, 2016
, respectively) on the Condensed Consolidated Balance Sheets.
|
|
|
(c)
|
Included in trade receivables, net on the Condensed Consolidated Balance Sheets.
|
|
|
(d)
|
Primarily includes deferred financing costs for the bank conduit facility and a security investment asset, which are included in other non-current assets on the Condensed Consolidated Balance Sheets.
|
|
|
(e)
|
Included in current (
$185 million
and
$195 million
as of
June 30, 2017
and
December 31, 2016
, respectively) and long-term (
$1,867 million
and
$1,946 million
as of
June 30, 2017
and
December 31, 2016
, respectively) securitized vacation ownership debt on the Condensed Consolidated Balance Sheets.
|
|
|
(f)
|
Includes deferred financing costs of
$22 million
and
$24 million
as of
June 30, 2017
and
December 31, 2016
, respectively, related to securitized debt.
|
|
|
(g)
|
Primarily includes accrued interest on securitized debt, which is included in accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets.
|
In addition, the Company has vacation ownership contract receivables that have not been securitized through bankruptcy-remote SPEs. Such gross receivables were
$991 million
and
$909 million
as of
June 30, 2017
and
December 31, 2016
, respectively.
A summary of total vacation ownership contract receivables and other securitized assets, net of securitized liabilities and the allowance for loan losses, is as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
SPE assets in excess of SPE liabilities
|
$
|
507
|
|
|
$
|
461
|
|
Non-securitized contract receivables
|
991
|
|
|
909
|
|
Less: Allowance for loan losses
|
643
|
|
|
621
|
|
Total, net
|
$
|
855
|
|
|
$
|
749
|
|
In addition to restricted cash related to securitizations, the Company had
$120 million
and
$59 million
of restricted cash related to escrow deposits as of
June 30, 2017
and
December 31, 2016
, respectively, which are recorded within other current assets on the Condensed Consolidated Balance Sheets.
Midtown 45, NYC Property
During 2013, the Company entered into an agreement with a third-party partner whereby the partner acquired the Midtown 45 property in New York City through an SPE. The Company is managing and operating the property for rental purposes while the Company converts it into VOI inventory. The SPE financed the acquisition and planned renovations with a four-year mortgage note and mandatorily redeemable equity provided by related parties of such partner. At the time of the agreement, the Company committed to purchase such VOI inventory from the SPE over a
four
-year period. Such proceeds from the purchase were used by the SPE to repay the four-year mortgage note and the mandatorily redeemable equity. The
Company is considered to be the primary beneficiary of the SPE and therefore, the Company consolidated the SPE within its financial statements. During the first quarter of 2017, the Company made its final purchase of VOI inventory from the SPE.
Clearwater, FL
Property
During 2015, the Company entered into an agreement with a third-party partner whereby the partner would develop and construct VOI inventory through an SPE. During the first quarter of 2017, the third-party partner met certain conditions of the agreement, which resulted in the Company committing to purchase
$51 million
of VOI inventory from the SPE over a two-year period. Such proceeds from the purchase will be used by the SPE to repay the mortgage notes. The Company is considered to be the primary beneficiary for specified assets and liabilities of the SPE and, therefore, the Company consolidated (non-cash)
$51 million
of both property and equipment and long-term debt on its Condensed Consolidated Balance Sheet.
The assets and liabilities of the Clearwater, FL Property and the Midtown 45, NYC Property SPEs are as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
Receivable for leased property and equipment
(a)
|
$
|
—
|
|
|
$
|
16
|
|
Property and equipment, net
|
35
|
|
|
—
|
|
Total SPE assets
|
35
|
|
|
16
|
|
Long-term debt
(b)
|
35
|
|
|
17
|
|
Total SPE liabilities
|
35
|
|
|
17
|
|
SPE deficit
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
|
(a)
|
Represents a receivable for assets leased to the Company which are reported within property and equipment, net on the Company’s Condensed Consolidated Balance Sheet.
|
|
|
(b)
|
As of
June 30, 2017
, included
$35 million
relating to a two-year mortgage note, of which
$25 million
was included in current portion of long-term debt on the Condensed Consolidated Balance Sheet. As of
December 31, 2016
, included
$15 million
relating to a four-year mortgage note due in 2017 and
$2 million
of mandatorily redeemable equity, both of which were included in current portion of long-term debt on the Condensed Consolidated Balance Sheet.
|
During the six months ended
June 30, 2017
and
2016
, the SPE conveyed
$30 million
and
$15 million
, respectively, of property and equipment to the Company.
The Company measures its financial assets and liabilities at fair value on a recurring basis and utilizes the fair value hierarchy to determine such fair values. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:
Level 1: Quoted prices for identical instruments in active markets.
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value driver is observable.
Level 3: Unobservable inputs used when little or no market data is available. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement falls has been determined based on the lowest level input (closest to Level 3) that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
As of
June 30, 2017
, the Company had interest rate swap contracts resulting in
$3 million
of assets which are included within other non-current assets and foreign exchange contracts resulting in
$2 million
of assets which are included within other current assets and
$1 million
of liabilities which are included within accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheet. As of
December 31, 2016
, the Company had foreign exchange contracts resulting in
$1 million
of assets which are included within other current assets and
$1 million
of liabilities which are included within accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheet. On a
recurring basis, such assets and liabilities are remeasured at estimated fair value (all of which are Level 2) and thus are equal to the carrying value.
The Company’s derivative instruments primarily consist of pay-fixed/receive-variable interest rate swaps, pay-variable/receive-fixed interest rate swaps, interest rate caps, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
Carrying
Amount
|
|
Estimated Fair Value
|
|
Carrying
Amount
|
|
Estimated Fair Value
|
Assets
|
|
|
|
|
|
|
|
Vacation ownership contract receivables, net
|
$
|
2,792
|
|
|
$
|
3,392
|
|
|
$
|
2,777
|
|
|
$
|
3,344
|
|
Debt
|
|
|
|
|
|
|
|
Total debt
|
5,760
|
|
|
5,905
|
|
|
5,512
|
|
|
5,579
|
|
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 (such senior notes are not actively traded).
|
|
9.
|
Derivative Instruments and Hedging Activities
|
Foreign Currency Risk
The Company has foreign currency rate exposure to exchange rate fluctuations worldwide with particular exposure to the British pound, Euro and the Canadian and Australian dollars. The Company uses freestanding foreign currency forward contracts to manage a portion of its exposure to changes in foreign currency exchange rates associated with its foreign currency denominated receivables, payables, forecasted earnings of foreign subsidiaries and intercompany borrowings that are denominated in currencies other than the Company’s underlying functional currency. During the first quarter of 2017, the Company undertook an internal restructuring to realign the capital structure of certain subsidiaries to minimize the exposure to changes in foreign currency exchange on certain intercompany borrowings.
Additionally, the Company uses foreign currency forward contracts designated as cash flow hedges to manage a portion of its exposure to changes in forecasted foreign currency denominated vendor payments. Gains and losses relating to freestanding foreign currency contracts are included in operating expenses on the Company’s Condensed Consolidated Statements of Income and are substantially offset by the earnings effect from the underlying items that were economically hedged. The freestanding foreign currency contracts resulted in
$1 million
of gains and
$6 million
of losses during the three months ended
June 30, 2017
and
2016
, respectively. The freestanding foreign currency contracts resulted in
$2 million
of gains and
$10 million
of losses during the six months ended
June 30, 2017
and
2016
, respectively. The amount
of gains or losses relating to contracts designated as cash flow hedges that the Company expects to reclassify from accumulated other comprehensive income (“AOCI”) to earnings over the next 12 months is not material.
Interest Rate Risk
A portion of the debt used to finance the Company’s operations is exposed to interest rate fluctuations. The Company uses various hedging strategies and derivative financial instruments to create a desired mix of fixed and floating rate assets and liabilities. Derivative instruments currently used in these hedging strategies include swaps and interest rate caps. The derivatives used to manage the risk associated with the Company’s floating rate debt include freestanding derivatives and derivatives designated as cash flow hedges. The Company also uses swaps to convert specific fixed-rate debt into variable-rate debt (i.e., fair value hedges) to manage the overall interest cost. For relationships designated as fair value hedges, changes in the fair value of the derivatives are recorded in income with offsetting adjustments to the carrying amount of the hedged debt. The amount of gains or losses that the Company expects to reclassify from AOCI to earnings during the next 12 months is not material.
Gains or losses recognized in AOCI for the three and six months ended
June 30, 2017
and
2016
were not material.
The Company files income tax returns in the U.S. federal and state jurisdictions, as well as in foreign jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for years prior to 2013. In addition, with few exceptions, the Company is no longer subject to state and local, or foreign income tax examinations for years prior to 2009.
The Company’s effective tax rates were
29.7%
and
36.3%
during the three months ended
June 30, 2017
and
2016
, respectively. The decrease was principally due to (i) the impact of non-cash impairment charges primarily related to the write-down of undeveloped VOI land, (ii) a tax benefit recognized from an internal restructuring undertaken to realign the organizational and capital structure of certain foreign operations, and (iii) a tax benefit associated with the recently adopted stock-based compensation pronouncement during 2017.
The Company’s effective tax rates were
22.6%
and
38.3%
during the six months ended
June 30, 2017
and
2016
, respectively. The decrease was principally due to (i) a tax benefit on foreign currency losses recognized from an internal restructuring undertaken to realign the organizational and capital structure of certain foreign operations, (ii) the impact of non-cash impairment charges primarily related to the write-down of undeveloped VOI land, and (iii) a tax benefit associated with the recently adopted stock-based compensation pronouncement during 2017.
The Company made cash income tax payments, net of refunds, of
$155 million
and
$65 million
during the six months ended
June 30, 2017
and
2016
, respectively.
|
|
11.
|
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 hotel group 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 destination network 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 or acts or occurrences related to 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 or acts or occurrences related to 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 wrongful termination, 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, fiduciary duty/trust claims, tax claims, environmental claims and landlord/tenant disputes.
The Company records an accrual for legal contingencies when it determines, after consultation with outside counsel, that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In making such determinations, the Company evaluates, among other things, the degree of probability of an unfavorable outcome and, when it is probable that a liability has been incurred, the Company’s ability to make a reasonable estimate of loss. The Company reviews these accruals each reporting period and makes revisions based on changes in facts and circumstances including changes to its strategy in dealing with these matters.
The
Company believes that it has adequately accrued for such matters wit
h reserves of
$45 million
an
d
$40 million
as of
June 30, 2017
and
December 31, 2016
, respectively. Such reserves are exclusive of matters relating to the Company’s separation from Cendant (“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. The Company had receivables of
$16 million
and
$20 million
as of
June 30, 2017
and
December 31, 2016
, respectively,
for certain matters which are covered by insurance and were included in other current assets on its Condensed Consolidated Balance Sheets. As of
June 30, 2017
, the potential exposure resulting from adverse outcomes of such legal proceedings could, in the aggregate, range up to
$63 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.
Other Guarantees/Indemnifications
Hotel Group
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 term of the guarantee and/or 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 original terms of the Company’s existing guarantees range from
8
to
10
years.
As of June 30, 2017, the Company had
three
guarantees for which the maximum potential amount of future payments that the Company may be required to fund was
$114 million
with a combined annual cap of
$27 million
. These guarantees have a remaining life of approximately
6
to
8
years with a weighted average life of approximately
6
years. One of the guarantees has a recapture provision and, as such, the Company had receivables of
$5 million
and
$4 million
as of
June 30, 2017
and
December 31, 2016
, respectively, which were included within other non-current assets on its Condensed Consolidated Balance Sheets. Such receivables were the result of payments made to date that are subject to recapture and which the Company believes will be recoverable from future operating performance.
As of
June 30, 2017
, the Company has an additional guarantee with a recapture provision under which the Company may be required to fund a maximum of
$36 million
. Such guarantee terminates in July 2020. The related hotel management agreement, which terminates in July 2038, also provides that the Company may have to fund future operating profitability shortfalls in excess of the maximum guarantee through the term of the management agreement. In the event the Company chooses not to fund any future operating profitability shortfalls, the hotel owner may terminate the hotel management agreement without penalty and the Company would be required to pay liquidated damages. The Company had a
$38 million
receivable related to this guarantee as of
June 30, 2017
, of which
$5 million
was included in other current assets and
$33 million
was included in other non-current assets on its Condensed Consolidated Balance Sheet. As of
December 31, 2016
, the Company had a
$32 million
receivable related to this guarantee which was included in other non-current assets on its Condensed Consolidated Balance Sheet. Such receivables were the result of payments made to date that are subject to recapture and which the Company believes will be recoverable from future operating performance.
In connection with such performance guarantees, as of
June 30, 2017
, the Company maintained a liability of
$20 million
, of which
$16 million
was included in other non-current liabilities and
$4 million
was included in accrued expenses and other current liabilities on its Condensed Consolidated Balance Sheet. As of
June 30, 2017
, the Company also had a corresponding
$30 million
asset related to these guarantees, of which
$26 million
was included in other non-current assets and
$4 million
was included in other current assets on its Condensed Consolidated Balance Sheet. As of
December 31, 2016
, the Company maintained a liability of
$24 million
, of which
$17 million
was included in other non-current liabilities and
$7 million
was included in accrued expenses and other current liabilities on its Condensed Consolidated Balance Sheet. As of
December 31, 2016
, the Company also had a corresponding
$32 million
asset related to the guarantees, of which
$28 million
was included in other non-current assets and
$4 million
was included in other current assets on its Condensed 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
for the three months ended
June 30, 2017
and
2016
, respectively, and
$2 million
for the six months ended
June 30, 2017
and
2016
, respectively.
Vacation Ownership
The Company has guaranteed to repurchase completed properties located in Las Vegas, Nevada and St. Thomas from third-party developers subject to such properties meeting the Company’s vacation ownership resort standards and provided that the third-party developers have not sold such properties to another party (see Note 5 - Inventory).
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. See Note 17 - Separation Adjustments and Transactions with Former Parent and Subsidiaries regarding contingent litigation liabilities resulting from the Separation.
|
|
12.
|
Accumulated Other Comprehensive (Loss)/Income
|
The components of AOCI are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
Unrealized
|
|
Defined
|
|
|
|
Currency
|
|
Gains
|
|
Benefit
|
|
|
|
Translation
|
|
on Cash Flow
|
|
Pension
|
|
|
Pretax
|
Adjustments
|
|
Hedges
|
|
Plans
|
|
AOCI
|
Balance, December 31, 2016
|
$
|
(225
|
)
|
|
$
|
—
|
|
|
$
|
(7
|
)
|
|
$
|
(232
|
)
|
Period change
|
83
|
|
|
—
|
|
|
—
|
|
|
83
|
|
Balance, June 30, 2017
|
$
|
(142
|
)
|
|
$
|
—
|
|
|
$
|
(7
|
)
|
|
$
|
(149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
$
|
116
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
119
|
|
Period change
|
(8
|
)
|
|
(1
|
)
|
|
—
|
|
|
(9
|
)
|
Balance, June 30, 2017
|
$
|
108
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of Tax
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
$
|
(109
|
)
|
|
$
|
1
|
|
|
$
|
(5
|
)
|
|
$
|
(113
|
)
|
Period change
|
75
|
|
|
(1
|
)
|
|
—
|
|
|
74
|
|
Balance, June 30, 2017
|
$
|
(34
|
)
|
|
$
|
—
|
|
|
$
|
(5
|
)
|
|
$
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
Unrealized
|
|
Defined
|
|
|
|
Currency
|
|
Gains
|
|
Benefit
|
|
|
|
Translation
|
|
on Cash Flow
|
|
Pension
|
|
|
Pretax
|
Adjustments
|
|
Hedges
|
|
Plans
|
|
AOCI
|
Balance, December 31, 2015
|
$
|
(139
|
)
|
|
$
|
—
|
|
|
$
|
(9
|
)
|
|
$
|
(148
|
)
|
Period change
|
(18
|
)
|
|
1
|
|
|
(1
|
)
|
|
(18
|
)
|
Balance, June 30, 2016
|
$
|
(157
|
)
|
|
$
|
1
|
|
|
$
|
(10
|
)
|
|
$
|
(166
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
|
|
|
|
|
|
|
|
Balance, December 31, 2015
|
$
|
70
|
|
|
$
|
1
|
|
|
$
|
3
|
|
|
$
|
74
|
|
Period change
|
26
|
|
|
—
|
|
|
—
|
|
|
26
|
|
Balance, June 30, 2016
|
$
|
96
|
|
|
$
|
1
|
|
|
$
|
3
|
|
|
$
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of Tax
|
|
|
|
|
|
|
|
Balance, December 31, 2015
|
$
|
(69
|
)
|
|
$
|
1
|
|
|
$
|
(6
|
)
|
|
$
|
(74
|
)
|
Period change
|
8
|
|
|
1
|
|
|
(1
|
)
|
|
8
|
|
Balance, June 30, 2016
|
$
|
(61
|
)
|
|
$
|
2
|
|
|
$
|
(7
|
)
|
|
$
|
(66
|
)
|
Currency translation adjustments exclude income taxes related to investments in foreign subsidiaries where the Company intends to reinvest the undistributed earnings indefinitely in those foreign operations.
|
|
13.
|
Stock-Based Compensation
|
The Company has a stock-based compensation plan available to grant RSUs, PSUs, SSARs and other stock-based awards to key employees, non-employee directors, advisors and consultants. Under the Wyndham Worldwide Corporation 2006 Equity and Incentive Plan, as amended, a maximum of
36.7 million
shares of common stock may be awarded. As of
June 30, 2017
,
15.4 million
shares remained available.
Incentive Equity Awards Granted by the Company
The activity related to incentive equity awards granted by the Company for the six months ended
June 30, 2017
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs
|
|
PSUs
|
|
SSARs
|
|
Number of RSUs
|
|
Weighted Average Grant Price
|
|
Number of PSUs
|
|
Weighted Average Grant Price
|
|
Number of SSARs
|
|
Weighted Average Exercise Price
|
Balance as of December 31, 2016
|
1.7
|
|
|
$
|
75.81
|
|
|
0.6
|
|
|
$
|
77.84
|
|
|
0.5
|
|
|
$
|
68.78
|
|
Granted
(a)
|
0.7
|
|
|
84.18
|
|
|
0.3
|
|
|
83.86
|
|
|
—
|
|
|
—
|
|
Vested / exercised
|
(0.7
|
)
|
|
73.75
|
|
|
(0.2
|
)
|
|
72.97
|
|
|
(0.1
|
)
|
|
44.57
|
|
Canceled
|
(0.1
|
)
|
|
77.89
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance as of June 30, 2017
|
1.6
|
|
(b) (c)
|
80.20
|
|
|
0.7
|
|
(d)
|
81.77
|
|
|
0.4
|
|
(e) (f)
|
74.37
|
|
|
|
(a)
|
Primarily represents awards granted by the Company on
February 28, 2017
.
|
|
|
(b)
|
Aggregate unrecognized compensation expense related to RSUs was
$115 million
as of
June 30, 2017
, which is expected to be recognized over a weighted average period of
2.9 years
.
|
|
|
(c)
|
Approximately
1.5
million RSUs outstanding as of
June 30, 2017
are expected to vest over time.
|
|
|
(d)
|
Maximum aggregate unrecognized compensation expense was
$41 million
as of
June 30, 2017
, which is expected to be recognized over a weighted average period of
2.1 years
.
|
|
|
(e)
|
Aggregate unrecognized compensation expense related to SSARs was
$2 million
as of
June 30, 2017
, which is expected to be recognized over a weighted average period of
2.1 years
.
|
|
|
(f)
|
Approximately
0.2 million
SSARs were exercisable as of
June 30, 2017
. The Company assumes that all unvested SSARs are expected to vest over time. SSARs outstanding as of
June 30, 2017
had an intrinsic value of
$7 million
and have a weighted average remaining contractual life of
2.8 years
.
|
During the six months ended
June 30, 2017
, the Company granted incentive equity awards totaling
$59 million
to key employees and senior officers in the form of RSUs. These awards will vest ratably over a period of
four
years. In addition, during the six months ended
June 30, 2017
, the Company granted incentive equity awards totaling
$22 million
to key employees and senior officers in the form of PSUs. These awards cliff vest on the third anniversary of the grant date, contingent upon the Company achieving certain performance metrics.
Stock-Based Compensation Expense
The Company adopted the stock compensation guidance on January 1, 2017, as required. The Company elected to use the prospective transition method and as such, the excess tax benefits from stock-based compensation was presented as part of operating activities within its current period Condensed Consolidated Statement of Cash Flows. In addition during the three and six months ended June 30, 2017, the Company included a net benefit of
$2 million
and
$6 million
, respectively, within provision for income taxes on the Condensed Consolidated Statements of Income.
The Company recorded stock-based compensation expense of
$15 million
and
$30 million
during the three and six months ended
June 30, 2017
, respectively, and
$22 million
and
$36 million
during the three and six months ended June 30, 2016, respectively, related to incentive equity awards granted to key employees and senior officers. The Company also recorded stock-based compensation expense for non-employee directors of less than
$1 million
during the three months ended June 30, 2017 and 2016 and
$1 million
during the six months ended June 30, 2017 and 2016. Additionally,
$1 million
of stock-based compensation expense was recorded within restructuring expense during the six months ended
June 30, 2017
.
The Company paid
$34 million
of taxes for the net share settlement of incentive equity awards during the six months ended
June 30, 2017
and
2016
. Such amounts are included within financing activities on the Condensed Consolidated Statements of Cash Flows.
The reportable segments presented below represent the Company’s operating segments for which separate financial information is available and which is utilized on a regular basis by its chief operating decision maker to assess performance and to allocate resources. In identifying its reportable segments, the Company also considers the nature of services provided by its operating segments. Management evaluates the operating results of each of its reportable segments based upon net revenues and “EBITDA”, which is defined as net income before depreciation and amortization, interest expense (excluding consumer financing interest), early extinguishment of debt, interest income (excluding consumer financing revenues) and income taxes, each of which is presented on the Condensed Consolidated Statements of Income. The Company believes that EBITDA is a useful measure of performance for its industry segments which, when considered with GAAP measures, the Company believes gives a more complete understanding of its operating performance. The Company’s presentation of EBITDA may not be comparable to similarly-titled measures used by other companies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2017
|
|
2016
|
|
Net Revenues
|
|
EBITDA
|
|
Net Revenues
|
|
EBITDA
|
Hotel Group
|
$
|
345
|
|
(b)
|
$
|
106
|
|
|
$
|
334
|
|
(d)
|
$
|
101
|
|
Destination Network
|
405
|
|
(c)
|
89
|
|
|
384
|
|
(c)
|
85
|
|
Vacation Ownership
|
750
|
|
|
47
|
|
|
705
|
|
|
187
|
|
Total Reportable Segments
|
1,500
|
|
|
242
|
|
|
1,423
|
|
|
373
|
|
Corporate and Other
(a)
|
(21
|
)
|
|
(28
|
)
|
|
(20
|
)
|
|
(33
|
)
|
Total Company
|
$
|
1,479
|
|
|
$
|
214
|
|
|
$
|
1,403
|
|
|
$
|
340
|
|
|
|
|
|
|
|
|
|
Reconciliation of Net income to EBITDA
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
2017
|
|
2016
|
Net income
|
|
|
|
|
$
|
78
|
|
|
$
|
156
|
|
Provision for income taxes
|
|
|
|
|
33
|
|
|
89
|
|
Depreciation and amortization
|
|
|
|
|
66
|
|
|
63
|
|
Interest expense
|
|
|
|
|
39
|
|
|
34
|
|
Interest income
|
|
|
|
|
(2
|
)
|
|
(2
|
)
|
EBITDA
|
|
|
|
|
$
|
214
|
|
|
$
|
340
|
|
|
|
(a)
|
Includes the elimination of transactions between segments.
|
|
|
(b)
|
Includes
$18 million
of intersegment revenues comprised of (i)
$15 million
of licensing fees for use of the Wyndham trade name and (ii)
$3 million
of other fees primarily associated with the Wyndham Rewards program. Such revenues are offset in expenses at the Company’s Vacation Ownership segment.
|
|
|
(c)
|
Includes
$3 million
and
$2 million
of intersegment revenues during the three months ended
June 30, 2017
and
2016
, primarily comprised of call center operations and support services provided to the Company’s Hotel Group segment.
|
|
|
(d)
|
Includes
$17 million
of intersegment revenues comprised of (i)
$15 million
of licensing fees for use of the Wyndham trade name, (ii)
$1 million
of other fees primarily associated with the Wyndham Rewards program and (iii)
$1 million
of room revenues at a Company owned hotel. Such revenues are offset in expenses at the Company’s Vacation Ownership segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
Net Revenues
|
|
EBITDA
|
|
Net Revenues
|
|
EBITDA
|
Hotel Group
|
$
|
643
|
|
(b)
|
$
|
191
|
|
|
$
|
629
|
|
(d)
|
$
|
185
|
|
Destination Network
|
797
|
|
(c)
|
191
|
|
|
768
|
|
(c)
|
166
|
|
Vacation Ownership
|
1,399
|
|
|
166
|
|
|
1,345
|
|
|
323
|
|
Total Reportable Segments
|
2,839
|
|
|
548
|
|
|
2,742
|
|
|
674
|
|
Corporate and Other
(a)
|
(41
|
)
|
|
(68
|
)
|
|
(36
|
)
|
|
(67
|
)
|
Total Company
|
$
|
2,798
|
|
|
$
|
480
|
|
|
$
|
2,706
|
|
|
$
|
607
|
|
|
|
|
|
|
|
|
|
Reconciliation of Net income to EBITDA
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
2017
|
|
2016
|
Net income
|
|
|
|
|
$
|
219
|
|
|
$
|
251
|
|
Provision for income taxes
|
|
|
|
|
64
|
|
|
156
|
|
Depreciation and amortization
|
|
|
|
|
128
|
|
|
125
|
|
Interest expense
|
|
|
|
|
73
|
|
|
68
|
|
Early extinguishment of debt
|
|
|
|
|
—
|
|
|
11
|
|
Interest income
|
|
|
|
|
(4
|
)
|
|
(4
|
)
|
EBITDA
|
|
|
|
|
$
|
480
|
|
|
$
|
607
|
|
|
|
(a)
|
Includes the elimination of transactions between segments.
|
|
|
(b)
|
Includes
$35 million
of intersegment revenues comprised of (i)
$28 million
of licensing fees for use of the Wyndham trade name and (ii)
$7 million
of other fees primarily associated with the Wyndham Rewards program. Such revenues are offset in expenses at the Company’s Vacation Ownership segment.
|
|
|
(c)
|
Includes
$6 million
and
$4 million
of intersegment revenues during the six months ended
June 30, 2017
and
2016
, respectively, primarily comprised of call center operations and support services provided to the Company’s Hotel Group segment.
|
|
|
(d)
|
Includes
$34 million
of intersegment revenues comprised of (i)
$28 million
of licensing fees for use of the Wyndham trade name, (ii)
$4 million
of other fees primarily associated with the Wyndham Rewards program and (iii)
$2 million
of room revenues at a Company owned hotel. Such revenues are offset in expenses at the Company’s Vacation Ownership segment.
|
|
|
15.
|
Asset Impairments and Other Charges
|
Asset Impairments
During May 2017, the Company’s new leadership at its vacation ownership business performed an in-depth review of its operations, including its current development pipeline and long-term development plan. In connection with such review, the Company updated its current and long-term development plan to focus on (i) selling existing finished inventory and (ii) procuring inventory from efficient sources such as just-in-time inventory in new markets and reclaiming inventory from owners’ associations or owners. As a result, the Company’s management performed a review of its land held for vacation ownership interests (“VOI”) development. Such review consisted of an assessment on
19
locations to determine its plan for future VOI development at those sites. As a result of this assessment, the Company concluded that no future development would occur at
17
locations, of which
16
were deemed to be impaired.
The Company performed a fair value assessment on the land held for VOI development which resulted in a
$121 million
non-cash impairment charge during the second quarter of 2017. In addition, the Company also recorded a
$14 million
non-cash impairment charge relating to the write-off of construction in process costs at
6
of the
16
impaired locations. As a result, the Company reported a total non-cash impairment charge of
$135 million
, which is included within asset impairments and other charges on the Condensed Consolidated Statements of Income.
In conjunction with this review and impairment, in May 2017, the Company sold
3
of the
17
locations, as well as non-core revenue generating assets to a former executive of the Company for
$2 million
of cash consideration which resulted in a
$7 million
loss. The Company also has an agreement with the former executive to sell an additional
2
of the
17
locations for
$2 million
resulting in a
$13 million
non-cash impairment charge. Such transaction is to be completed no later than December 31, 2017. The
$7 million
loss and
$13 million
non-cash impairment charge on the expected sale were included within the total non-cash impairment charge of
$135 million
.
The Company had
$19 million
of land classified as assets held for sale as of
June 30, 2017
which was included within other current assets on the Company’s Consolidated Condensed Balance Sheet. The fair value of the land held for sale was determined by reviewing prices of comparable assets which were recently sold and by actual purchase and sale agreements for the assets to be sold which represents level 3 fair value measurements. The land held for sale locations are currently being actively marketed at estimated fair value and are expected to be sold within a year. The Company has entered into a three year agreement with the former executive whereby such executive may assist the Company in selling the land held for sale. As part of such agreement, the former executive will be entitled to receive brokerage commissions upon the sale of land classified as assets held for sale.
During the six months ended
June 30, 2017
, the Company incurred a
$5 million
non-cash impairment charge related to the write-down of assets resulting from the decision to abandon a new product initiative at the Company’s vacation ownership business. Such charge is recorded within asset impairments on the Condensed Consolidated Statement of Income.
Other Charges
During the six months ended
June 30, 2016
, the Company incurred a
$24 million
foreign exchange loss, primarily impacting cash, resulting from the Venezuelan government’s decision to devalue the exchange rate of its currency. Such loss is recorded within operating expenses on the Condensed Consolidated Statement of Income.
2017 Restructuring Plans
During the first quarter of 2017, the Company recorded
$7 million
of restructuring charges, all of which were personnel-related and consisted of (i)
$6 million
at its corporate operations which focused on rationalizing its sourcing function and outsourcing certain information technology functions and (ii)
$1 million
at its Hotel Group segment which primarily focused on realigning its brand operations. During the six months ended
June 30, 2017
, the Company reduced its liability by
$5 million
, of which
$4 million
was in cash payments and
$1 million
was through the issuance of Wyndham stock. The remaining liability of
$2 million
, as of
June 30, 2017
, is expected to be paid by the end of 2017.
2016 Restructuring Plans
During 2016, the Company recorded
$15 million
of charges related to restructuring initiatives, primarily focused on enhancing organizational efficiency and rationalizing existing facilities which included the closure of
four
vacation ownership sales offices. In connection with these initiatives, the Company initially recorded
$12 million
of personnel-related costs, a
$2 million
non-cash charge and
$2 million
of facility-related expenses. In 2016, the Company subsequently reversed
$1 million
of previously recorded personnel-related costs and reduced its liability with
$5 million
of cash payments. During the six months ended
June 30, 2017
, the Company reduced its liability with
$5 million
of cash payments. The remaining liability of
$3 million
, as of
June 30, 2017
, is primarily related to leased facilities, and is expected to be paid by the end of 2019.
The Company has additional restructuring plans which were implemented prior to 2016. The remaining liability of
$1 million
as of
June 30, 2017
, all of which is related to leased facilities, is expected to be paid by 2020.
The activity associated with all of the Company’s restructuring plans is summarized by category as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability as of
|
|
Costs
|
|
Cash
|
|
|
|
Liability as of
|
|
December 31, 2016
|
|
Recognized
|
|
Payments
|
|
Other
|
|
June 30, 2017
|
Personnel-related
|
$
|
6
|
|
|
$
|
7
|
|
(a)
|
$
|
(9
|
)
|
|
$
|
(1
|
)
|
(b)
|
$
|
3
|
|
Facility-related
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
$
|
9
|
|
|
$
|
7
|
|
|
$
|
(9
|
)
|
|
$
|
(1
|
)
|
|
$
|
6
|
|
|
|
(a)
|
Represents severance costs resulting from a reduction of
80
employees.
|
|
|
(b)
|
Represents the issuance of Wyndham stock.
|
|
|
17.
|
Separation Adjustments and Transactions with Former Parent and
Subsidiaries
|
Transfer of Cendant Corporate Liabilities and Issuance
of Guarantees to Cendant and Affiliates
Pursuant to the Separation and Distribution Agreement, upon the distribution of the Company’s common stock to Cendant shareholders, the Company entered into certain guarantee commitments with Cendant (pursuant to the assumption of certain liabilities and the obligation to indemnify Cendant, Realogy and Travelport for such liabilities) and guarantee commitments related to deferred compensation arrangements with each of Cendant and Realogy. These guarantee arrangements primarily relate to certain contingent litigation liabilities, contingent tax liabilities, and Cendant contingent and other corporate liabilities, of which the Company assumed and is responsible for
37.5%
while Realogy is responsible for the remaining
62.5%
. The remaining amount of liabilities which were assumed by the Company in connection with the Separation was
$23 million
as of both
June 30, 2017
and
December 31, 2016
. These amounts were comprised of certain Cendant corporate liabilities which were recorded on the books of Cendant as well as additional liabilities which were established for guarantees issued at the date of Separation, related to unresolved contingent matters and others that could arise during the guarantee period. Regarding the guarantees, if any of the companies responsible for all or a portion of such liabilities were to default in its payment of costs or expenses related to any such liability, the Company would be responsible for a portion of the defaulting party or parties’ obligation(s). The Company also provided a default guarantee related to certain deferred compensation arrangements related to certain current and former senior officers and directors of Cendant, Realogy and Travelport. These arrangements were valued upon the Separation in accordance with the guidance for guarantees and recorded as liabilities on the Condensed Consolidated Balance Sheets. To the extent such recorded liabilities are not adequate to cover the ultimate payment amounts, such excess will be reflected as an expense to the results of operations in future periods.
As a result of the sale of Realogy on April 10, 2007, Realogy was required to post a letter of credit in an amount acceptable to the Company and Avis Budget Group (formerly known as Cendant) to satisfy its obligations for the Cendant legacy contingent liabilities. As of
June 30, 2017
, the letter of credit was
$53 million
.
As of
June 30, 2017
, the Separation related liabilities of
$23 million
is comprised of
$20 million
for tax liabilities,
$1 million
for other contingent and corporate liabilities and
$2 million
of liabilities where the calculated guarantee amount exceeded the contingent liability assumed at the Separation Date. In connection with these liabilities, as of
June 30, 2017
,
$10 million
was recorded within accrued expenses and other current liabilities and
$13 million
was recorded within other non-current liabilities on the Condensed Consolidated Balance Sheet. As of
December 31, 2016
, the Company had
$23 million
of Separation related liabilities of which
$10 million
was recorded within accrued expenses and other current liabilities and
$13 million
was recorded within other non-current liabilities on the Condensed Consolidated Balance Sheet. The Company will indemnify Cendant for these contingent liabilities and therefore any payments made to the third-party would be through the former Parent. The actual timing of payments relating to these liabilities is dependent on a variety of factors beyond the Company’s control. In addition, the Company had
$1 million
of receivables due from former Parent and subsidiaries primarily relating to income taxes, as of both
June 30, 2017
and
December 31, 2016
, which were included within other current assets on the Condensed Consolidated Balance Sheets.
AmericInn Acquisition
On July 18, 2017, the Company announced its plan to acquire the AmericInn hotel brand and its management company, Three Rivers Hospitality, from Northcott Hospitality for
$170 million
. AmericInn’s portfolio consists of
200
primarily franchised hotels predominately in the Midwestern United States. The Company intends to explore options to divest the owned portfolio, which consists of
10
hotels. The transaction is subject to regulatory and government approval and the satisfaction of customary closing conditions.
Spin-Off Transaction
On August 2, 2017, the Company announced plans to spin-off its hotel business thus creating two separate, publicly traded companies. As a result of the proposed transaction, Wyndham Hotel Group, with headquarters in Parsippany, NJ, will be a new, publicly traded pure-play hotel franchise company with a portfolio of renowned brands. Wyndham Vacation Ownership, with headquarters in Orlando, Florida, will be the largest publicly traded timeshare company and will include Wyndham Destination Network, home to RCI, the world’s largest timeshare exchange company. The Company will also explore strategic alternatives for its European rental brands.
The transaction, which is expected to be tax-free to Wyndham Worldwide and its shareholders, will be effected through a pro-rata distribution of the new hotel entity’s stock to existing Wyndham Worldwide shareholders. Wyndham Worldwide expects the transaction to be completed in the first half of 2018.