NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise noted, all amounts are in millions, except share and per share amounts)
(Unaudited)
|
|
1
.
|
Background and Basis of Presentation
|
Background
Wyndham Destinations, Inc. and its subsidiaries (collectively, “Wyndham Destinations” or the “Company”), is a global provider of hospitality services and products. The Company operates in
two
segments: Vacation Ownership and Exchange & Rentals. The Vacation Ownership segment develops, markets and sells vacation ownership interests (“VOIs”) to individual consumers, provides consumer financing in connection with the sale of VOIs and provides property management services at resorts. The Exchange & Rentals segment provides vacation exchange services and products to owners of VOIs and manages and markets vacation rental properties primarily on behalf of independent owners.
During the fourth quarter of 2018, the Company decided to explore strategic alternatives for its North American vacation rentals business. The assets and liabilities of this business have been classified as held-for-sale as of June 30, 2019 and December 31, 2018. The business does not meet the criteria to be classified as a discontinued operation; therefore, the results are reflected within continuing operations on the Condensed Consolidated Statements of Income.
See Note
6
—
Held-for-Sale Business
for further details. On July 30, 2019, the Company entered into an agreement for the sale of its North American vacation rentals business. See Note
24
—
Subsequent Events
for additional details.
During 2018, the Company completed the spin-off of Wyndham Hotels & Resorts, Inc. (“Spin-off”) and the sale of its European vacation rentals business.
The prior period Condensed Consolidated Financial Statements have been reclassified to reflect the results of the hotel business and European vacation rentals business as discontinued operations. See further detail in Note
5
—
Discontinued Operations
.
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q include the accounts and transactions of Wyndham Destinations, as well as the entities in which Wyndham Destinations 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 (“U.S.”). All intercompany balances and transactions have been eliminated in the Condensed Consolidated Financial Statements. In addition, certain prior period amounts have been reclassified to comply with newly adopted accounting standards. See further detail in Note
2
—
New Accounting Pronouncements
.
In presenting the Condensed Consolidated Financial Statements, management makes estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses 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
2018
Consolidated Financial Statements included in its Annual Report filed on Form 10-K with the Securities and Exchange Commission on
February 26, 2019
.
|
|
2
.
|
New Accounting Pronouncements
|
Recently Issued Accounting Pronouncements
Financial Instruments - Credit Losses
. In June 2016, the Financial Accounting Standards Board (“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.
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 the 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.
Recently Adopted Accounting Pronouncements
Leases.
In February 2016, the FASB issued guidance for lease accounting. The guidance requires a lessee to recognize right-of-use assets and lease liabilities on the balance sheet for all lease obligations and disclose key information about leasing arrangements, such as the amount, timing, and uncertainty of cash flows arising from leases. The Company adopted this standard using the modified retrospective approach; therefore, the Company used the transition method practical expedient under ASU 2018-11 and prior year financial statements were not recast. As a result of the adoption, on January 1, 2019 the Company recognized
$158 million
of right-of-use assets and
$200 million
of related lease liabilities. Right-of-use assets were decreased by
$42 million
of tenant improvement allowances and deferred rent balances reclassified from other liabilities. Both the right-of-use assets and related lease liabilities recognized upon adoption included
$21 million
associated with the Company’s held-for-sale business. Right-of-use assets are included within Other assets and the related lease liabilities are included within Accrued and other liabilities on the Condensed Consolidated Balance Sheets. The adoption of this standard did not have a material impact to the income statement related to existing leases; therefore a cumulative-effect adjustment was not recorded. The adoption of this standard did not materially impact consolidated net income, liquidity or compliance with our debt covenants under our current agreements. See Note
15
—
Leases
for more information.
Implementation Costs in Cloud Computing Arrangements.
In August 2018, the FASB issued guidance on implementation costs incurred in a cloud computing arrangement that is a service contract. This guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining internal-use software and also adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing arrangements. This guidance is effective for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years, with early adoption permitted. The Company early adopted this guidance as of January 1, 2019 on a prospective basis. The adoption of this guidance did not have a material impact on the Company’s financial statements and related disclosures.
Stock Compensation - Improvements to Nonemployee Share-Based Payment Accounting.
In June 2018, the FASB issued guidance intended to simplify nonemployee share-based payment accounting. This new guidance more closely aligns the accounting for share-based payment awards issued to employees and nonemployees. The Company adopted this guidance as of January 1, 2019 with no material impact to its Condensed Consolidated Financial Statements and related disclosures.
Vacation Ownership
The Company 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. The Company’s sales of VOIs are either cash sales or developer-financed sales. Developer financed sales are typically collateralized by the underlying VOI. Revenue is recognized on VOI sales upon transfer of control, which is defined as the point in time when a binding sales contract has been executed, the financing contract has been executed for the remaining transaction price, the statutory rescission period has expired and the transaction price has been deemed to be collectible.
For developer-financed sales, the Company reduces the VOI sales transaction price by an estimate of uncollectible consideration at the time of the sale. The Company’s estimates of uncollectible amounts are based largely on the results of the Company’s static pool analysis which relies on historical payment data by customer class.
In connection with entering into a VOI sale, the Company may provide its customers with certain non-cash incentives, such as credits for future stays at its resorts. For those VOI sales, the Company bifurcates the sale and allocates the sales price between the VOI sale and the non-cash incentive. Non-cash incentives generally have expiration periods of
18 months
or less and are recognized at a point in time upon transfer of control.
The Company provides day-to-day property management services including oversight of housekeeping services, maintenance and certain accounting and administrative services for property owners’ associations and clubs. These services may also include reservation and resort renovation activities. Such agreements are generally for terms of
one year
or less, and are renewed automatically on an annual basis. The Company’s management agreements contain cancellation clauses, which allow for either party to cancel the agreement, by either a majority board vote or a majority vote of non-developer interests. The Company receives fees for such property management services which are collected monthly in advance and are based upon total costs to operate such resorts (or as services are provided in the case of resort renovation activities). Fees for property management services typically approximate
10%
of budgeted operating expenses. The Company is entitled to consideration for reimbursement of costs incurred on behalf of the property owners’ association in providing the management services (“reimbursable revenue”). These reimbursable costs principally relate to the payroll costs for management of the associations, club and resort properties where the Company is the employer and are reflected as a component of Operating expenses on the Condensed Consolidated Statements of Income. The Company reduces its management fees for amounts it has paid to the property owners’ association that reflect maintenance fees for VOIs for which it retains ownership, as the Company has concluded that such payments are consideration payable to a customer.
Property management fee revenues are recognized when the services are performed and are recorded as a component of Service and membership fees on the Condensed Consolidated Statements of Income. Property management revenues, which are comprised of management fee revenue and reimbursable revenue, were
$170 million
and
$162 million
during the three months ended
June 30, 2019
and
2018
, respectively, and
$341 million
and
$325 million
during the
six months ended
June 30, 2019
and
2018
.
Exchange & Rentals
As a provider of vacation exchange services, the Company enters into affiliation agreements with developers of vacation ownership properties to allow owners of VOIs to trade their intervals for intervals at other properties affiliated with the Company’s vacation exchange brands and, for some members, for other leisure-related services and products. Additionally, as a marketer of vacation rental properties, generally the Company enters into contracts for exclusive periods of time with property owners to market the rental of such properties to rental customers.
The Company’s vacation exchange brands derive a majority of revenues from membership dues and fees for facilitating members’ trading of their intervals. Revenues from membership dues represent the fees paid by members or affiliated clubs on their behalf. The Company recognizes revenues from membership dues paid by the member on a straight-line basis over the membership period as the performance obligations are fulfilled through delivery of publications, if applicable, and by providing access to other travel-related products and services. Estimated net contract consideration payable by affiliated clubs for memberships are recognized as revenue over the term of the contract with the affiliated club in proportion to the estimated average monthly member count. Such estimates are adjusted periodically for changes in the actual and forecasted member activity. For additional fees, members have the right to exchange their intervals for intervals at other properties affiliated with the Company’s vacation exchange networks and, for certain members, for other leisure-related services and products. Fees for facilitating exchanges are recognized as revenue, net of expected cancellations, when these transactions have been confirmed to the member.
The Company’s vacation exchange brands also derive revenues from: (i) additional services, programs with affiliated resorts, club servicing and loyalty programs and (ii) additional exchange-related products that provide members with the ability to protect trading power or points, extend the life of deposits, and combine two or more deposits for the opportunity to exchange into intervals with higher trading power. Other vacation exchange related product fees are deferred and recognized as revenue upon the occurrence of a future exchange, other related transaction or event.
The Company earns revenue from its RCI Elite Rewards co–branded credit card program which is primarily generated by cardholder spending and the enrollment of new cardholders. The advance payments received under the program are recognized as a contract liability until the Company’s performance obligations have been satisfied. The primary performance obligation for the program relates to brand performance services. Total contract consideration is estimated and recognized on a straight-line basis over the contract term.
The Company’s vacation rental brands derive revenue from fees associated with the rental of vacation rental properties managed and marketed by the Company on behalf of independent owners. The Company remits the rental fee received from the renter to the independent owner, net of the Company’s agreed-upon fee. The related revenue from such fees, net of expected refunds, is recognized over the renter’s stay. The Company’s vacation rental brands also derive revenues from additional services delivered to independent owners, vacation rental guests, and property owners’ associations that are generally recognized when the service is delivered.
Other Items
The Company records property management services revenues and RCI Elite Rewards revenues for its Vacation Ownership and Exchange & Rentals segments in accordance with the guidance for reporting revenues gross as a principal versus net as an agent, which requires that these revenues be recorded on a gross basis.
Contract Liabilities
Contract liabilities generally represent payments or consideration received in advance for goods or services that the Company has not yet transferred to the customer. Contract liabilities as of
June 30, 2019
and
December 31, 2018
are as follows:
|
|
|
|
|
|
|
|
|
|
Contract Liabilities
(a)
|
|
June 30,
2019
|
|
December 31, 2018
|
Deferred subscription revenue
|
|
$
|
220
|
|
|
$
|
220
|
|
Deferred VOI trial package revenue
|
|
137
|
|
|
125
|
|
Deferred VOI incentive revenue
|
|
103
|
|
|
96
|
|
Deferred exchange-related revenue
(b)
|
|
57
|
|
|
56
|
|
Deferred co-branded credit card programs revenue
|
|
21
|
|
|
14
|
|
Deferred other revenue
|
|
17
|
|
|
8
|
|
Total
|
|
$
|
555
|
|
|
$
|
519
|
|
|
|
(a)
|
There is
$60 million
and
$42 million
of deferred vacation rental revenue included in Liabilities of held-for-sale business on the Condensed Consolidated Balance Sheets for
2019
and
2018
, respectively.
|
|
|
(b)
|
Balance includes contractual liabilities to accommodate members for cancellations initiated by the Company due to unexpected events. These amounts are included within Accrued expenses and other liabilities on the Condensed Consolidated Balance Sheet.
|
In the Company’s vacation ownership business, deferred VOI trial package revenue represents consideration received in advance for a trial VOI, which allows customers to utilize a vacation package typically within
one year
of purchase. Deferred VOI incentive revenue represents payments received in advance for additional travel-related services and products at the time of a VOI sale. Revenue is recognized when a customer utilizes the additional services and products, which is typically within
one year
of the VOI sale.
Within the Company’s vacation exchange business, deferred subscription revenue represents billings and payments received in advance from members and affiliated clubs for memberships in the Company’s vacation exchange programs which are recognized in future periods. Deferred exchange-related revenue primarily represents payments received in advance from members for the right to exchange their intervals for intervals at other properties affiliated with the Company’s vacation exchange networks and for other leisure-related services and products which are generally recognized as revenue within
one year
. In the Company's vacation rentals business, deferred vacation rental revenue represents billings and payments received in advance of a customer’s rental stay which are generally recognized as revenue within
one year
.
Changes in contract liabilities for the
six months ended
June 30, 2019
follow:
|
|
|
|
|
|
|
|
Amount
|
Contract liabilities as of December 31, 2018
|
|
$
|
519
|
|
Additions
|
|
224
|
|
Revenue recognized
|
|
(188
|
)
|
Contract liabilities as of June 30, 2019
|
|
$
|
555
|
|
Capitalized Contract Costs
The Company’s vacation ownership business incurs certain direct and incremental selling costs in connection with VOI trial package and incentive revenues. Such costs are capitalized and subsequently amortized over the utilization period, which is typically within
one year
of the sale. These capitalized costs were
$51 million
as of
June 30, 2019
and
$45 million
as of
December 31, 2018
, and are included within Other assets on the Condensed Consolidated Balance Sheet.
The Company’s vacation exchange and vacation rentals businesses incur certain direct and incremental selling costs to obtain contracts with customers in connection with subscription revenues, exchange–related revenues, and vacation rental
revenues. Such costs, which are primarily comprised of commissions paid to internal and external parties and credit card processing fees, are deferred at the inception of the contract and recognized when the benefit is transferred to the customer. As of
June 30, 2019
and
December 31, 2018
, these capitalized costs were
$20 million
, and
$22 million
, respectively. In addition, there were
$2 million
of these capitalized costs included within Assets of held-for-sale business as of
June 30, 2019
.
Practical Expedients
The Company has not adjusted the consideration for the effects of a significant financing component if it expected, at contract inception, that the period between when the Company satisfied the performance obligation and when the customer paid for that good or service was
one year
or less.
For contracts with customers that were modified prior to 2015, the Company did not retrospectively restate the revenue associated with the contract for those modifications. Instead, it reflected the aggregate effect of all prior modifications in determining (i) the performance obligations and transaction prices and (ii) the allocation of such transaction prices to the performance obligations.
Performance Obligations
A performance obligation is a promise in a contract with a customer to transfer a distinct good or service to the customer. The consideration received from a customer is allocated to each distinct performance obligation and recognized as revenue when, or as, each performance obligation is satisfied. The following table summarizes the Company’s remaining performance obligations for the twelve month periods set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/1/2019 - 6/30/2020
|
|
7/1/2020 - 6/30/2021
|
|
7/1/2021 - 6/30/2022
|
|
Thereafter
|
|
Total
|
Subscription revenue
|
|
$
|
126
|
|
|
$
|
52
|
|
|
$
|
23
|
|
|
$
|
19
|
|
|
$
|
220
|
|
VOI trial package revenue
|
|
137
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
137
|
|
VOI incentive revenue
|
|
103
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
103
|
|
Exchange-related revenue
|
|
51
|
|
|
4
|
|
|
1
|
|
|
1
|
|
|
57
|
|
Co-branded credit card programs revenue
|
|
5
|
|
|
4
|
|
|
4
|
|
|
8
|
|
|
21
|
|
Other revenue
|
|
17
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
17
|
|
Total
|
|
$
|
439
|
|
|
$
|
60
|
|
|
$
|
28
|
|
|
$
|
28
|
|
|
$
|
555
|
|
Disaggregation of Net Revenues
The table below presents a disaggregation of the Company’s net revenues from contracts with customers by major services and products for each of the Company’s segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Vacation Ownership
|
|
|
|
|
|
|
|
Vacation ownership interest sales
|
$
|
481
|
|
|
$
|
462
|
|
|
$
|
856
|
|
|
$
|
820
|
|
Property management fees and reimbursable revenues
|
170
|
|
|
162
|
|
|
341
|
|
|
325
|
|
Consumer financing
|
128
|
|
|
120
|
|
|
253
|
|
|
237
|
|
Fee-for-Service commissions
|
12
|
|
|
10
|
|
|
12
|
|
|
20
|
|
Ancillary revenues
|
19
|
|
|
16
|
|
|
31
|
|
|
29
|
|
Total Vacation Ownership
|
810
|
|
|
770
|
|
|
1,493
|
|
|
1,431
|
|
|
|
|
|
|
|
|
|
Exchange & Rentals
|
|
|
|
|
|
|
|
Exchange revenues
|
161
|
|
|
166
|
|
|
340
|
|
|
354
|
|
Vacation rental revenues
|
48
|
|
|
47
|
|
|
86
|
|
|
85
|
|
Ancillary revenues
|
21
|
|
|
25
|
|
|
40
|
|
|
45
|
|
Total Exchange & Rentals
|
230
|
|
|
238
|
|
|
466
|
|
|
484
|
|
|
|
|
|
|
|
|
|
Corporate and other
|
|
|
|
|
|
|
|
Ancillary revenues
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
Eliminations
|
(3
|
)
|
|
(1
|
)
|
|
(4
|
)
|
|
(1
|
)
|
Total Corporate and other
|
(1
|
)
|
|
(1
|
)
|
|
(2
|
)
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
Net revenues
|
$
|
1,039
|
|
|
$
|
1,007
|
|
|
$
|
1,957
|
|
|
$
|
1,914
|
|
The computation of basic and diluted earnings per share (“EPS”) is based on net income attributable to Wyndham Destinations shareholders divided by the basic weighted average number of common shares and diluted weighted average number of common shares, respectively. The following table sets forth the computation of basic and diluted EPS (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net income/(loss) from continuing operations attributable to Wyndham Destinations shareholders
|
$
|
118
|
|
|
$
|
(12
|
)
|
|
$
|
199
|
|
|
$
|
29
|
|
Loss from operations of discontinued businesses attributable to Wyndham Destinations shareholders, net of tax
|
—
|
|
|
(42
|
)
|
|
—
|
|
|
(49
|
)
|
Gain on disposal of discontinued businesses attributable to Wyndham Destinations shareholders, net of tax
|
6
|
|
|
432
|
|
|
5
|
|
|
432
|
|
Net income attributable to Wyndham Destinations shareholders
|
$
|
124
|
|
|
$
|
378
|
|
|
$
|
204
|
|
|
$
|
412
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
1.27
|
|
|
$
|
(0.12
|
)
|
|
$
|
2.12
|
|
|
$
|
0.29
|
|
Discontinued operations
|
0.06
|
|
|
3.90
|
|
|
0.05
|
|
|
3.83
|
|
|
$
|
1.33
|
|
|
$
|
3.78
|
|
|
$
|
2.17
|
|
|
$
|
4.12
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
Continuing operations
(a)
|
$
|
1.26
|
|
|
$
|
(0.12
|
)
|
|
$
|
2.12
|
|
|
$
|
0.29
|
|
Discontinued operations
|
0.06
|
|
|
3.89
|
|
|
0.05
|
|
|
3.82
|
|
|
$
|
1.32
|
|
|
$
|
3.77
|
|
|
$
|
2.17
|
|
|
$
|
4.11
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
93.0
|
|
|
100.0
|
|
|
93.7
|
|
|
100.1
|
|
Stock-settled appreciation rights (“SSARs”), RSUs
(b)
and PSUs
(c)
|
0.3
|
|
|
0.3
|
|
|
0.3
|
|
|
0.3
|
|
Diluted weighted average shares outstanding
(d)(e)
|
93.3
|
|
|
100.3
|
|
|
94.0
|
|
|
100.4
|
|
|
|
|
|
|
|
|
|
Dividends:
|
|
|
|
|
|
|
|
Aggregate dividends paid to shareholders
|
$
|
42
|
|
|
$
|
44
|
|
|
$
|
84
|
|
|
$
|
114
|
|
|
|
(a)
|
For the three months ended June 30, 2018, the dilutive impacts of SSARS, RSUs and PSUs were excluded from the diluted EPS calculation for continuing operations as their impact would have been anti-dilutive given the Company’s loss from continuing operations.
|
|
|
(b)
|
Excludes
0.9 million
and
0.8 million
restricted stock units (“RSUs”) that would have been anti-dilutive to EPS for the
three and six months ended June 30, 2019
, but could potentially dilute earnings per share in the future. Excludes
0.2 million
of unvested RSUs for the three months ended
June 30, 2018
that would have been dilutive but given the Company’s loss from continuing operations would have had an anti-dilutive impact to EPS. The number of anti-dilutive RSUs for the six months ended
June 30, 2018
, the number was immaterial.
|
|
|
(c)
|
Excludes
0.2 million
performance-vested stock units (“PSUs”) for the
three and six months ended June 30, 2019
, respectively, as the Company has not met the required performance metrics. These PSUs could potentially dilute earnings per share in the future. As a result of the spin-off of Wyndham Hotels during the second quarter of 2018, the Company accelerated the vesting of outstanding PSUs. There were
no
outstanding PSUs as of
June 30, 2018
.
|
|
|
(d)
|
Excludes
1.3 million
and
1.1 million
outstanding stock awards that would have been anti-dilutive to EPS for the
three and six months ended June 30, 2019
, and
0.3 million
and
0.1 million
of anti-dilutive outstanding stock options for the
three and six months ended June 30, 2018
. These outstanding stock awards could potentially dilute earnings per share in the future.
|
|
|
(e)
|
The dilutive impact of the Company’s potential common stock is computed utilizing the treasury stock method using average market prices during the period.
|
Stock Repurchase Program
The following table summarizes stock repurchase activity under the current stock repurchase program:
|
|
|
|
|
|
|
|
|
Shares Repurchased
|
|
Cost
|
As of December 31, 2018
|
100.6
|
|
|
$
|
5,262
|
|
Repurchases
|
3.0
|
|
|
125
|
|
As of June 30, 2019
|
103.6
|
|
|
$
|
5,387
|
|
The Company had
$691 million
of remaining availability under its program as of
June 30, 2019
.
|
|
5
.
|
Discontinued Operations
|
During 2018, the Company completed the spin-off of its hotel business and the sale of its European vacation rentals business. As a result, the Company has classified the results of operations for these businesses as discontinued operations in its Condensed Consolidated Financial Statements and related notes. Discontinued operations include direct expenses clearly identifiable to the businesses being discontinued. The Company does not expect to incur significant ongoing expenses classified as discontinued operations except for certain tax adjustments that may be required as final tax returns are completed. Discontinued operations exclude the allocation of corporate overhead and interest.
Prior to its classification as a discontinued operation, the hotel business comprised the Hotel Group segment and the European vacation rentals business was part of the former Destination Network segment, now known as Exchange & Rentals.
The following table presents information regarding certain components of income from discontinued operations, net of income taxes for the
three and six months ended
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net revenues
|
$
|
—
|
|
|
$
|
311
|
|
|
$
|
—
|
|
|
$
|
720
|
|
Expenses:
|
|
|
|
|
|
|
|
Operating
|
—
|
|
|
150
|
|
|
—
|
|
|
340
|
|
Marketing
|
—
|
|
|
86
|
|
|
—
|
|
|
200
|
|
General and administrative
|
—
|
|
|
34
|
|
|
—
|
|
|
89
|
|
Separation and related costs
|
—
|
|
|
72
|
|
|
—
|
|
|
93
|
|
Depreciation and amortization
|
—
|
|
|
18
|
|
|
—
|
|
|
52
|
|
Total expenses
|
—
|
|
|
360
|
|
|
—
|
|
|
774
|
|
Other (income), net
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
(Benefit) for income taxes
|
—
|
|
|
(9
|
)
|
|
—
|
|
|
(5
|
)
|
Loss from operations of discontinued businesses, net of income taxes
|
—
|
|
|
(42
|
)
|
|
—
|
|
|
(49
|
)
|
Gain on disposal of discontinued businesses, net of income taxes
|
6
|
|
|
432
|
|
|
5
|
|
|
432
|
|
Income from discontinued operations, net of income taxes
|
$
|
6
|
|
|
$
|
390
|
|
|
$
|
5
|
|
|
$
|
383
|
|
The following table presents information regarding certain components of cash flows from discontinued operations for the six months ended:
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
June 30, 2018
|
Cash flows (used in)/provided by operating activities
|
$
|
(1
|
)
|
|
$
|
212
|
|
Cash flows used in investing activities
|
(22
|
)
|
|
(672
|
)
|
Cash flows provided by financing activities
|
—
|
|
|
2,066
|
|
|
|
|
|
Non-cash items:
|
|
|
|
Forgiveness of intercompany debt from Wyndham Hotels
|
—
|
|
|
197
|
|
Depreciation and amortization
|
—
|
|
|
52
|
|
Stock-based compensation
|
—
|
|
|
22
|
|
Deferred income taxes
|
—
|
|
|
(23
|
)
|
|
|
|
|
Property and equipment additions
|
—
|
|
|
(38
|
)
|
Net assets of business acquired, net of cash acquired
|
—
|
|
|
(1,695
|
)
|
Proceeds from sale of businesses and asset sales
|
—
|
|
|
1,052
|
|
|
|
6
.
|
Held-for-Sale Business
|
During the fourth quarter of 2018, the Company decided to explore strategic alternatives for its North American vacation rentals business. The assets and liabilities of this business have been classified as held-for-sale as of June 30, 2019 and December 31, 2018. The business does not meet the criteria to be classified as a discontinued operation; therefore, the results are reflected within continuing operations on the Condensed Consolidated Statements of Income.
This business is currently reported within the Exchange & Rentals segment.
Total assets of this business at
June 30, 2019
were
$272 million
including
$74 million
Restricted cash,
$81 million
Trade receivables, net,
$43 million
Goodwill and other intangibles, net,
$36 million
Property & equipment, net and
$33 million
Other assets. Total liabilities of this business at
June 30, 2019
were
$249 million
including
$122 million
Accounts payable,
$60 million
Deferred income and
$60 million
Accrued expenses and other liabilities.
Total assets of this business at
December 31, 2018
were
$203 million
including
$31 million
Restricted cash,
$82 million
Trade receivables, net,
$42 million
Goodwill and other intangibles, net,
$35 million
Property & equipment, net and
$8 million
Other Assets. Total liabilities of this business at
December 31, 2018
were
$165 million
including
$87 million
Accounts payable,
$42 million
Deferred income and
$27 million
Accrued expenses and other liabilities.
On July 30, 2019, the Company entered into an agreement for the sale of its North American vacation rentals business. See Note
24
—
Subsequent Events
for additional details.
|
|
7
.
|
Vacation Ownership Contract Receivables
|
The Company generates vacation ownership contract receivables by extending financing to the purchasers of its VOIs. Vacation ownership contract receivables, net consisted of:
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
Vacation ownership contract receivables:
|
|
|
|
Securitized
|
$
|
2,916
|
|
|
$
|
2,883
|
|
Non-securitized
|
867
|
|
|
888
|
|
Vacation ownership contract receivables, gross
|
3,783
|
|
|
3,771
|
|
Less: Allowance for loan losses
|
735
|
|
|
734
|
|
Vacation ownership contract receivables, net
|
$
|
3,048
|
|
|
$
|
3,037
|
|
The Company’s securitized vacation ownership contract receivables generated interest income of
$101 million
and
$200 million
during the
three and six months ended
June 30, 2019
, respectively, and
$89 million
and
$175 million
during the
three and six months ended
June 30, 2018
, respectively. Such interest income is included within Consumer financing revenue on the Condensed Consolidated Statements of Income.
During the
six months ended
June 30, 2019
and
2018
, the Company originated vacation ownership contract receivables of
$718 million
and
$686 million
, respectively, and received principal collections of
$467 million
and
$453 million
, respectively. The weighted average interest rate on outstanding vacation ownership contract receivables was
14.2%
and
14.1%
as of
June 30, 2019
and
December 31, 2018
, respectively.
The activity in the allowance for loan losses on vacation ownership contract receivables was as follows:
|
|
|
|
|
|
Amount
|
Allowance for loan losses as of December 31, 2018
|
$
|
734
|
|
Provision for loan losses
|
238
|
|
Contract receivables write-offs, net
|
(237
|
)
|
Allowance for loan losses as of June 30, 2019
|
$
|
735
|
|
|
|
|
|
|
|
Amount
|
Allowance for loan losses as of December 31, 2017
|
$
|
691
|
|
Provision for loan losses
|
218
|
|
Contract receivables write-offs, net
|
(204
|
)
|
Allowance for loan losses as of June 30, 2018
|
$
|
705
|
|
The Company recorded a provision for loan losses of
$129 million
and
$238 million
as a reduction of net revenues during the
three and six months ended
June 30, 2019
and
$126 million
and
$218 million
for the
three and six months ended
June 30, 2018
, 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 Fair Isaac Corporation (“FICO”) score. A FICO score is a branded version of a consumer credit score widely used in the United States by the largest banks and lending institutions. FICO scores range from
300
to
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, from 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 Club Asia Pacific business for which scores are not readily available).
The following table details an aging analysis of financing receivables using the most recently updated FICO scores (based on the policy described above):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2019
|
|
700+
|
|
600-699
|
|
<600
|
|
No Score
|
|
Asia Pacific
|
|
Total
|
Current
|
$
|
1,988
|
|
|
$
|
1,056
|
|
|
$
|
195
|
|
|
$
|
135
|
|
|
$
|
249
|
|
|
$
|
3,623
|
|
31 - 60 days
|
19
|
|
|
26
|
|
|
19
|
|
|
5
|
|
|
2
|
|
|
71
|
|
61 - 90 days
|
14
|
|
|
17
|
|
|
13
|
|
|
3
|
|
|
1
|
|
|
48
|
|
91 - 120 days
|
11
|
|
|
13
|
|
|
14
|
|
|
3
|
|
|
—
|
|
|
41
|
|
Total
|
$
|
2,032
|
|
|
$
|
1,112
|
|
|
$
|
241
|
|
|
$
|
146
|
|
|
$
|
252
|
|
|
$
|
3,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
700+
|
|
600-699
|
|
<600
|
|
No Score
|
|
Asia Pacific
|
|
Total
|
Current
|
$
|
1,996
|
|
|
$
|
1,041
|
|
|
$
|
166
|
|
|
$
|
135
|
|
|
$
|
246
|
|
|
$
|
3,584
|
|
31 - 60 days
|
22
|
|
|
35
|
|
|
18
|
|
|
6
|
|
|
2
|
|
|
83
|
|
61 - 90 days
|
15
|
|
|
22
|
|
|
13
|
|
|
3
|
|
|
1
|
|
|
54
|
|
91 - 120 days
|
12
|
|
|
17
|
|
|
16
|
|
|
4
|
|
|
1
|
|
|
50
|
|
Total
|
$
|
2,045
|
|
|
$
|
1,115
|
|
|
$
|
213
|
|
|
$
|
148
|
|
|
$
|
250
|
|
|
$
|
3,771
|
|
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,
2019
|
|
December 31,
2018
|
Land held for VOI development
|
$
|
4
|
|
|
$
|
4
|
|
VOI construction in process
|
25
|
|
|
45
|
|
Inventory sold subject to repurchase
|
29
|
|
|
33
|
|
Completed VOI inventory
|
817
|
|
|
797
|
|
Estimated VOI recoveries
|
279
|
|
|
286
|
|
Exchange & Rentals vacation credits and other
|
62
|
|
|
59
|
|
Total inventory
|
$
|
1,216
|
|
|
$
|
1,224
|
|
During the
six months ended
June 30, 2019
and
2018
, the Company had net transfers of
$12 million
and
$35 million
, respectively, of VOI inventory to property and equipment.
Inventory Sale Transactions
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 these agreements with 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. The Company’s conditional rights and obligations constitute continuing involvement therefore prohibiting the Company from accounting for these transactions as sales.
During 2017, the Company acquired property located in Austin, Texas from a third-party developer for vacation ownership inventory and property and equipment.
Inventory Obligations
The following table summarizes the activity related to the Company’s inventory obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avon
(a)
|
|
Las Vegas
(a)
|
|
Austin
(a)
|
|
Other
(b)
|
|
Total
|
December 31, 2017
|
$
|
22
|
|
|
$
|
60
|
|
|
$
|
62
|
|
|
$
|
6
|
|
|
$
|
150
|
|
Purchases
|
—
|
|
|
11
|
|
|
—
|
|
|
89
|
|
|
100
|
|
Payments
|
(11
|
)
|
|
(16
|
)
|
|
(31
|
)
|
|
(88
|
)
|
|
(146
|
)
|
June 30, 2018
|
$
|
11
|
|
|
$
|
55
|
|
|
$
|
31
|
|
|
$
|
7
|
|
|
$
|
104
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
$
|
11
|
|
|
$
|
52
|
|
|
$
|
31
|
|
|
$
|
6
|
|
|
$
|
100
|
|
Purchases
|
—
|
|
|
13
|
|
|
1
|
|
|
60
|
|
|
74
|
|
Payments
|
(11
|
)
|
|
(18
|
)
|
|
(32
|
)
|
|
(53
|
)
|
|
(114
|
)
|
June 30, 2019
|
$
|
—
|
|
|
$
|
47
|
|
|
$
|
—
|
|
|
$
|
13
|
|
|
$
|
60
|
|
|
|
(a)
|
Included in Accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets.
|
|
|
(b)
|
Included in Accounts payable on the Condensed Consolidated Balance Sheets.
|
The Company has committed to repurchase the completed property located in Las Vegas, Nevada from a third-party developer subject to the property meeting the Company’s vacation ownership resort standards and provided that the third-party developer has not sold the property to another party. The maximum potential future payments that the Company may be required to make under these commitments was
$142 million
as of
June 30, 2019
.
|
|
9
.
|
Property and Equipment
|
Property and equipment, net, consisted of:
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31, 2018
|
Land
|
$
|
32
|
|
|
$
|
30
|
|
Building and leasehold improvements
|
618
|
|
|
588
|
|
Furniture, fixtures and equipment
|
242
|
|
|
250
|
|
Capitalized software
|
631
|
|
|
604
|
|
Finance leases
|
11
|
|
|
12
|
|
Construction in progress
|
49
|
|
|
81
|
|
Total property and equipment
|
1,583
|
|
|
1,565
|
|
Less: Accumulated depreciation and amortization
|
868
|
|
|
853
|
|
Net property and equipment
|
$
|
715
|
|
|
$
|
712
|
|
The Company’s indebtedness consisted of:
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
Non-recourse vacation ownership debt
:
(a)
|
|
|
|
Term notes
(b)
|
$
|
1,769
|
|
|
$
|
1,839
|
|
$800 million bank conduit facility (due August 2021)
(c)
|
605
|
|
|
518
|
|
Total
|
$
|
2,374
|
|
|
$
|
2,357
|
|
|
|
|
|
Debt
:
(d)
|
|
|
|
$1.0 billion secured revolving credit facility (due May 2023)
(e)
|
$
|
368
|
|
|
$
|
181
|
|
$300 million secured term loan B (due May 2025)
|
295
|
|
|
296
|
|
$40 million 7.375% secured notes (due March 2020)
|
40
|
|
|
40
|
|
$250 million 5.625% secured notes (due March 2021)
|
249
|
|
|
249
|
|
$650 million 4.25% secured notes (due March 2022)
(f)
|
649
|
|
|
649
|
|
$400 million 3.90% secured notes (due March 2023)
(g)
|
404
|
|
|
405
|
|
$300 million 5.40% secured notes (due April 2024)
|
298
|
|
|
297
|
|
$350 million 6.35% secured notes (due October 2025)
(h)
|
342
|
|
|
341
|
|
$400 million 5.75% secured notes (due April 2027)
(i)
|
410
|
|
|
388
|
|
Finance leases
|
3
|
|
|
3
|
|
Other
|
—
|
|
|
32
|
|
Total
|
$
|
3,058
|
|
|
$
|
2,881
|
|
|
|
(a)
|
Represents non-recourse debt that is securitized through bankruptcy-remote special purpose entities, 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
$3.06 billion
and
$3.03 billion
of underlying gross vacation ownership contract receivables and related assets (which legally are not assets of the Company) as of
June 30, 2019
and
December 31, 2018
, respectively.
|
|
|
(b)
|
The carrying amounts of the term notes are net of debt issuance costs aggregating
$20 million
and
$21 million
as of
June 30, 2019
and
December 31, 2018
, respectively.
|
|
|
(c)
|
The Company has borrowing capability under the Sierra Receivable Funding Conduit II 2008-A facility through August 2021. Borrowings under this facility are required to be repaid as the collateralized receivables amortize but no later than September 2022.
|
|
|
(d)
|
The carrying amounts of the secured notes and term loan are net of unamortized discounts of
$10 million
and
$11 million
as of
June 30, 2019
and
December 31, 2018
, respectively, and net of unamortized debt financing costs of
$6 million
as of
June 30, 2019
and
December 31, 2018
, respectively.
|
|
|
(e)
|
For the
six months ended
June 30, 2019
, the weighted average effective interest rate on borrowings from this facility was
5.94%
.
|
|
|
(f)
|
Includes
$1 million
of unamortized gains from the settlement of a derivative as of
June 30, 2019
and
December 31, 2018
.
|
|
|
(g)
|
Includes
$5 million
and
$6 million
of unamortized gains from the settlement of a derivative as of
June 30, 2019
and
December 31, 2018
.
|
|
|
(h)
|
Includes
$6 million
and
$7 million
of unamortized losses from the settlement of a derivative as of
June 30, 2019
and
December 31, 2018
.
|
|
|
(i)
|
Includes
$12 million
of unamortized gains from the settlement of a derivative and
$2 million
increase in the carrying value resulting from a fair value hedge derivative as of
June 30, 2019
, and
$8 million
decrease in the carrying value resulting from a fair value hedge derivative as of
|
December 31, 2018
. As of
June 30, 2019
, the variable interest rate on the notional portion of these notes was
4.59%
, and the effective rate was
5.84%
.
Sierra Timeshare 2019-1 Receivables Funding LLC
On March 20, 2019, the Company closed on a private placement of a series of term notes payable, issued by Sierra Timeshare 2019-1 Receivables Fundings LLC, with an initial principal amount of
$400 million
, which are secured by vacation ownership contract receivables and bear interest at a weighted average coupon rate of
3.57%
. The advance rate for this transaction was
98.00%
.
Sierra Timeshare Conduit Renewal
On April 24, 2019, the Company renewed its
$800 million
non-recourse vacation ownership conduit facility, extending the end of the commitment period from April 6, 2020 to August 30, 2021.
Fair Value Hedges
During the first quarter of 2017, the Company entered into pay-variable/receive-fixed interest rate swap agreements on its
5.75%
secured notes with notional amounts of
$400 million
. The fixed interest rates on these notes were effectively modified to a variable LIBOR-based index. During June 2019, the Company terminated
$350 million
of these swap agreements resulting in a gain of
$12 million
, which will be amortized over the remaining life of the secured notes as a reduction to Interest expense on the Condensed Consolidated Statements of Income. The Company had
$12 million
of deferred gains associated with this transaction as of
June 30, 2019
, which are included within Debt on the Condensed Consolidated Balance Sheets.
Maturities and Capacity
The Company’s outstanding debt as of
June 30, 2019
matures as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-recourse Vacation Ownership Debt
|
|
Debt
|
|
Total
|
Within 1 year
|
$
|
195
|
|
|
$
|
41
|
|
|
$
|
236
|
|
Between 1 and 2 years
|
220
|
|
|
250
|
|
|
470
|
|
Between 2 and 3 years
|
724
|
|
|
649
|
|
|
1,373
|
|
Between 3 and 4 years
|
204
|
|
|
773
|
|
|
977
|
|
Between 4 and 5 years
|
217
|
|
|
298
|
|
|
515
|
|
Thereafter
|
814
|
|
|
1,047
|
|
|
1,861
|
|
|
$
|
2,374
|
|
|
$
|
3,058
|
|
|
$
|
5,432
|
|
Required principal payments on the non-recourse vacation ownership debt are based on the contractual repayment terms of the underlying vacation ownership contract receivables. Actual maturities may differ as a result of prepayments by the vacation ownership contract receivable obligors.
As of
June 30, 2019
, available capacity under the Company’s borrowing arrangements was as follows:
|
|
|
|
|
|
|
|
|
|
Non-recourse Conduit Facilities
(a)
|
|
Revolving
Credit Facilities
(b)
|
Total capacity
|
$
|
800
|
|
|
$
|
1,000
|
|
Less: Outstanding borrowings
|
605
|
|
|
368
|
|
Less: Letters of credit
|
—
|
|
|
21
|
|
Available capacity
|
$
|
195
|
|
|
$
|
611
|
|
|
|
(a)
|
Consists of the Company’s Sierra Receivable Funding Conduit II 2008-A facility. The capacity of this facility is subject to the Company’s ability to provide additional assets to collateralize additional non-recourse borrowings.
|
|
|
(b)
|
Consists of the Company’s
$1.0 billion
revolving credit facility.
|
Debt Covenants
The revolving credit facilities and term loan B are subject to covenants including the maintenance of specific financial ratios as defined in the credit agreement. The financial ratio covenants consist of a minimum interest coverage ratio of at least
2.5
to 1.0 as of the measurement date and a maximum first lien leverage ratio not to exceed
4.25
to 1.0 as of the
measurement date. The interest coverage ratio is calculated by dividing consolidated EBITDA (as defined in the credit agreement) by consolidated interest expense (as defined in the credit agreement), both as measured on a trailing 12-month basis preceding the measurement date. As of
June 30, 2019
, our interest coverage ratio was
6.5
to 1.0. The first lien leverage ratio is calculated by dividing consolidated first lien debt (as defined in the credit agreement) as of the measurement date by consolidated EBITDA (as defined in the credit agreement) as measured on a trailing 12-month basis preceding the measurement date. As of
June 30, 2019
, our first lien leverage ratio was
2.9
to 1.0. These ratios do not include interest expense or indebtedness related to any qualified securitization financing (as defined in the credit agreement). As of
June 30, 2019
, we were in compliance with all of the financial covenants described above.
Each of our non-recourse, securitized term notes, and the bank conduit facilities contain various triggers relating to the performance of the applicable loan pools. If the vacation ownership contract receivables pool that collateralizes one of our securitization notes fails to perform within the parameters established by the contractual triggers (such as higher default or delinquency rates), there are provisions pursuant to which the cash flows for that pool will be maintained in the securitization as extra collateral for the note holders or applied to accelerate the repayment of outstanding principal to the note holders. As of
June 30, 2019
, all of our securitized loan pools were in compliance with applicable contractual triggers.
Interest Expense
During the
three and six months ended
June 30, 2019
, the Company incurred interest expense of
$40 million
and
$82 million
, respectively, on debt excluding non-recourse vacation ownership debt, including an offset of
$1 million
of capitalized interest in each period. Such amounts are included within Interest expense on the Condensed Consolidated Statements of Income. Cash paid related to such interest was
$79 million
during the
six months ended
June 30, 2019
.
During the
three and six months ended
June 30, 2018
, the Company incurred interest expense of
$46 million
and
$91 million
, respectively, on debt excluding non-recourse vacation ownership debt, including an offset of 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 such interest was
$90 million
during the
six months ended
June 30, 2018
.
Interest
expense incurred in connection with the Company’s non-recourse vacation ownership debt during the
three and six months ended
June 30, 2019
was
$26 million
and
$52 million
, respectively, and
$20 million
and
$39 million
during the
three and six months ended
June 30, 2018
, respectively, and is recorded within Consumer financing interest on the Condensed Consolidated Statements of Income. Cash paid related to such interest was
$41 million
and
$25 million
for the
six months ended
June 30, 2019
and
2018
.
Transition from LIBOR
The Company is currently evaluating the impact of the transition from LIBOR
as an interest rate benchmark to other potential alternative reference rates, including but not limited to the Secured Overnight Financing Rate (“SOFR”). Currently the Company has several debt and derivative instruments in place that reference LIBOR-based rates. The transition from LIBOR is estimated to take place in 2021 and management will continue to actively assess the related opportunities and risks involved in this transition.
|
|
11
.
|
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, special purpose entities (“SPEs”) and equity investments, to determine if an entity in which the Company has a variable interest is a VIE. If the entity is considered to be a VIE, the Company determines whether it would be considered the entity’s primary beneficiary. The Company consolidates into its financial statements those VIEs for which it has determined that it is the primary beneficiary.
Vacation Ownership Contract Receivables Securitizations
The Company pools qualifying vacation ownership contract receivables and sells them to bankruptcy-remote entities. Vacation ownership contract receivables qualify for securitization based primarily on the credit strength of the VOI purchaser to whom financing has been extended. Vacation ownership contract receivables are securitized through bankruptcy-remote SPEs that are consolidated within the Company’s 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 arm’s-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,
2019
|
|
December 31,
2018
|
Securitized contract receivables, gross
(a)
|
$
|
2,916
|
|
|
$
|
2,883
|
|
Securitized restricted cash
(b)
|
118
|
|
|
120
|
|
Interest receivables on securitized contract receivables
(c)
|
24
|
|
|
23
|
|
Other assets
(d)
|
4
|
|
|
3
|
|
Total SPE assets
|
3,062
|
|
|
3,029
|
|
Non-recourse term notes
(e) (f)
|
1,769
|
|
|
1,839
|
|
Non-recourse conduit facilities
(e)
|
605
|
|
|
518
|
|
Other liabilities
(g)
|
6
|
|
|
3
|
|
Total SPE liabilities
|
2,380
|
|
|
2,360
|
|
SPE assets in excess of SPE liabilities
|
$
|
682
|
|
|
$
|
669
|
|
|
|
(a)
|
Included in Vacation ownership contract receivables, net on the Condensed Consolidated Balance Sheets.
|
|
|
(b)
|
Included in Restricted cash 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 is included in Other assets on the Condensed Consolidated Balance Sheets.
|
|
|
(e)
|
Included in Non-recourse vacation ownership debt on the Condensed Consolidated Balance Sheets.
|
|
|
(f)
|
Includes deferred financing costs of
$20 million
and
$21 million
as of
June 30, 2019
and
December 31, 2018
, respectively, related to non-recourse debt.
|
|
|
(g)
|
Primarily includes accrued interest on non-recourse debt, which is included in Accrued expenses and other 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
$867 million
and
$888 million
as of
June 30, 2019
and
December 31, 2018
, respectively.
A summary of total vacation ownership contract receivables and other securitized assets, net of non-recourse liabilities and the allowance for loan losses, is as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
December 31,
2018
|
SPE assets in excess of SPE liabilities
|
$
|
682
|
|
|
$
|
669
|
|
Non-securitized contract receivables
|
867
|
|
|
888
|
|
Less: Allowance for loan losses
|
735
|
|
|
734
|
|
Total, net
|
$
|
814
|
|
|
$
|
823
|
|
Saint Thomas, U.S. Virgin Islands
Property
During 2015, the Company sold real property located in Saint Thomas, U.S. Virgin Islands to a third-party developer to construct VOI inventory through an SPE. In accordance with the agreements with the third-party developer, the Company has conditional rights and conditional obligations to repurchase the completed property from the developer subject to the property conforming to the Company's vacation ownership resort standards and provided that the third-party developer has not sold the property to another party.
As a result of a disruption to VOI sales caused by the impact of the hurricanes on Saint Thomas, U.S. Virgin Islands in 2017, there was a change in the economics of the transaction due to a reduction in the fair value of the assets of the SPE. As such, the Company is now considered the primary beneficiary for specified assets and liabilities of the SPE, and therefore consolidated
$64 million
of Property and equipment and
$104 million
of Debt on its Condensed Consolidated Balance Sheet. As a result of this consolidation, the Company incurred a non-cash
$37 million
loss due to a write-down of property and equipment to fair value. During the first quarter of 2019, the Company made its final purchase of VOI inventory from the SPE, and the debt was extinguished.
The assets and liabilities of the Saint Thomas Property SPE were as follows:
|
|
|
|
|
|
December 31,
2018
|
Property and equipment, net
|
$
|
23
|
|
Total SPE assets
|
23
|
|
Debt
(a)
|
32
|
|
Total SPE liabilities
|
32
|
|
SPE equity (deficit)
|
$
|
(9
|
)
|
|
|
(a)
|
Included
$32 million
relating to mortgage notes, which were included in Debt on the Condensed Consolidated Balance Sheets as of
December 31, 2018
.
|
During the
six months ended
June 30, 2019
and
2018
, the SPE conveyed
$23 million
and
$17 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.
The Company’s derivative instruments primarily consist of receive-fixed/pay-variable interest rate swaps, interest rate caps, and foreign exchange forward contracts.
As of
June 30, 2019
, the Company had interest rate swap contracts and foreign exchange contracts resulting in
$1 million
and less than
$1 million
, respectively, of assets which are included within Other assets 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.
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, 2019
|
|
December 31, 2018
|
|
Carrying
Amount
|
|
Estimated Fair Value
|
|
Carrying
Amount
|
|
Estimated Fair Value
|
Assets
|
|
|
|
|
|
|
|
Vacation ownership contract receivables, net
|
$
|
3,048
|
|
|
$
|
3,721
|
|
|
$
|
3,037
|
|
|
$
|
3,662
|
|
Debt
|
|
|
|
|
|
|
|
Total debt
|
$
|
5,432
|
|
|
$
|
5,520
|
|
|
$
|
5,238
|
|
|
$
|
4,604
|
|
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 non-recourse 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 debt, excluding finance leases, using Level 2 inputs based on indicative bids from investment banks and determines the fair value of its secured notes using quoted market prices (such secured notes are not actively traded).
|
|
13
.
|
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, the Canadian and Australian dollars and the Mexican peso. 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 and forecasted earnings of foreign subsidiaries. Additionally, the Company has used 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. The amount of gains or losses relating to contracts designated as cash flow hedges that the Company expects to reclassify from Accumulated other comprehensive loss (“AOCL”) 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. Interest rate swaps are used to convert specific fixed-rate debt into variable-rate debt (i.e., fair value hedges) to manage the overall interest cost. For relationships designated as fair value hedges, changes in fair value of the derivatives were recorded to income, partially offset by changes in the fair value of the hedged debt. The difference in these values resulted in an immaterial impact to the Condensed Consolidated Statements of Income.
Losses on derivatives recognized in AOCL for the
three and six months ended
June 30, 2019
and
2018
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 2015. In addition, with few exceptions, the Company is no longer subject to state, local or foreign income tax examinations for years prior to 2010.
The Company’s effective tax rate decreased from
146.2%
during the three months ended
June 30, 2018
to
27.2%
during the three months ended
June 30, 2019
primarily due to the absence of non-cash state tax charges associated with the separation of the hotel business.
The Company’s effective tax rate decreased from
68.1%
during the
six months
ended
June 30, 2018
to
27.1%
during the
six months ended June 30, 2019
primarily due to the absence of non-cash tax charges from certain internal restructurings associated with the sale of the European vacation rentals business and non-cash state tax charges associated with the separation of the hotel business during 2018; partially offset by excess tax benefits in relation to stock based compensation in 2018.
The Company made cash income tax payments, net of tax refunds, of
$53 million
and
$92 million
during the
six months ended
June 30, 2019
and
2018
, respectively. The Company also made cash income tax payments of
$39 million
during the six months ended June 30, 2019 resulting from the sale of the Company’s European vacation rentals business. In addition, the Company made cash income tax payments, net of refunds, of $
10 million
during the
six months ended
June 30, 2018
related to discontinued operations.
15
.
Leases
The Company adopted the new Leases accounting standard as of January 1, 2019, resulting in the recognition of
$158 million
of right-of-use assets and
$200 million
of related lease liabilities. Right-of-use assets were decreased by
$42 million
of tenant improvement allowances and deferred rent balances reclassified from other liabilities. Both the right-of-use assets and related lease liabilities recognized upon adoption included
$21 million
associated with the Company’s held-for-sale business. The new standard requires a lessee to recognize right-of-use assets and lease liabilities on the balance sheet for all lease obligations and disclose key information about leasing arrangements, such as the amount, timing, and uncertainty of cash flows arising from leases. We adopted the standard using the modified retrospective approach; therefore, prior year financial statements were not recast. We elected the package of transition provisions available for expired or existing contracts, which allowed us to carryforward our historical assessments of (i) whether contracts are leases or contain leases, (ii) lease classification and (iii) initial direct costs.
We lease property and equipment under finance and operating leases for our corporate headquarters, administrative functions, marketing and sales offices, and various other facilities and equipment. For leases with terms greater than 12 months, we record the related asset and obligation at the present value of lease payments over the term. Many of our leases include rental escalation clauses, lease incentives, renewal options and/or termination options that are factored into our determination of lease payments. The Company elected the hindsight practical expedient to determine the reasonably certain lease term for existing leases. The Company also made an accounting policy election to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments on a straight-line basis over the lease term in the income statement.
When available, we use the rate implicit in the lease to discount lease payments to present value; however, most of our leases do not provide a readily determinable implicit rate. Therefore, we must estimate our incremental borrowing rate to discount the lease payments based on information available at lease commencement. Our leases have remaining lease terms of
one year
to
20 years
, some of which include options to extend the leases for up to
five years
, and some of which include options to terminate the leases within
one year
.
As of
June 30, 2019
, the Company had right-of-use assets of
$137 million
and related lease liabilities of
$182 million
. Right-of-use assets are included within Other assets, and the related lease liabilities are included within Accrued and other liabilities on the balance sheet.
The table below presents certain information related to the lease costs for finance and operating leases:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2019
|
|
2019
|
Operating lease cost
|
$
|
8
|
|
|
$
|
17
|
|
|
|
|
|
Short-term lease cost
|
$
|
5
|
|
|
$
|
10
|
|
|
|
|
|
Finance lease cost:
|
|
|
|
Amortization of right-of-use assets
|
$
|
—
|
|
|
$
|
1
|
|
Interest on lease liabilities
|
—
|
|
|
—
|
|
Total finance lease cost
|
$
|
—
|
|
|
$
|
1
|
|
The table below presents supplemental cash flow information related to leases:
|
|
|
|
|
|
Six Months Ended
|
|
June 30,
|
|
2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash flows from operating leases
|
$
|
20
|
|
Operating cash flows from finance leases
|
$
|
—
|
|
Financing cash flows from finance leases
|
$
|
1
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
Operating leases
|
$
|
22
|
|
Finance leases
|
$
|
1
|
|
The table below presents the lease-related assets and liabilities recorded on the balance sheet:
|
|
|
|
|
|
|
|
Balance Sheet Classification
|
|
June 30, 2019
|
Operating Leases:
|
|
|
|
Operating lease right-of-use assets
|
Other assets
|
|
$
|
137
|
|
Operating lease liabilities
|
Accrued expenses and other liabilities
|
|
$
|
182
|
|
|
|
|
|
Finance Leases:
|
|
|
|
Finance lease assets
(a)
|
Property and equipment, net
|
|
$
|
3
|
|
Finance lease liabilities
|
Debt
|
|
$
|
3
|
|
|
|
|
|
Weighted Average Remaining Lease Term:
|
|
|
|
Operating leases
|
|
|
9.4 years
|
|
Finance leases
|
|
|
2.1 years
|
|
Weighted Average Discount Rate:
|
|
|
|
Operating leases
(b)
|
|
|
6.7
|
%
|
Finance leases
|
|
|
4.3
|
%
|
(a)
Presented net of accumulated depreciation.
(b)
Upon adoption of the new lease standard, discount rates used for existing leases were established at January 1, 2019.
The table below presents maturities of lease liabilities as of
June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance
Leases
|
Six months ending December 31, 2019
|
$
|
20
|
|
|
$
|
1
|
|
2020
|
36
|
|
|
1
|
|
2021
|
30
|
|
|
1
|
|
2022
|
27
|
|
|
—
|
|
2023
|
25
|
|
|
—
|
|
Thereafter
|
110
|
|
|
—
|
|
Total minimum lease payments
|
248
|
|
|
3
|
|
Less: Amount of lease payments representing interest
|
(66
|
)
|
|
—
|
|
Present value of future minimum lease payments
|
$
|
182
|
|
|
$
|
3
|
|
The table below presents future minimum lease payments required under non-cancelable operating leases as reported in the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2018
, filed with the SEC on
February 26, 2019
:
|
|
|
|
|
|
December 31, 2018
|
2019
|
$
|
34
|
|
2020
|
30
|
|
2021
|
26
|
|
2022
|
24
|
|
2023
|
22
|
|
Thereafter
|
99
|
|
Future minimum lease payments
|
$
|
235
|
|
During 2018, the Company incurred total rental expense of
$61 million
for continuing operations and
$9 million
for discontinued operations.
Subsequent to the spin-off of Wyndham Hotels and in accordance with the Company’s decision to further reduce its corporate footprint, the Company focused on rationalizing existing facilities which included abandoning portions of its administrative offices in New Jersey. As a result, during the second quarter of 2019 the Company recorded $
10 million
of non-cash impairment charges associated with the write-off of right-of-use assets and furniture, fixtures and equipment.
These impairment charges are included within Separation and related costs on the Condensed Consolidated Statements of Income.
16
.
Commitments and Contingencies
The
Company is involved in claims, legal and regulatory proceedings, and governmental inquiries related to the Company’s business, none of which, in the opinion of management, is expected to have a material effect on our results of operations or financial condition.
Wyndham Destinations Litigation
The Company may be from time to time 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 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 or in relation to guest reservations and bookings; and negligence, breach of contract, fraud, consumer protection and other statutory claims by guests and other consumers for alleged injuries sustained at or acts or occurrences related to vacation ownership units or resorts or in relation to guest reservations and bookings; for its exchange and rentals business–breach of contract, fraud and bad faith claims by affiliates and customers in connection with their respective agreements, negligence, breach of contract, fraud, consumer protection and other statutory claims asserted by members, guests and other consumers for alleged injuries sustained at or acts or occurrences related to affiliated resorts and vacation rental properties, or in relation to guest reservations and bookings; and for each of its businesses, bankruptcy proceedings involving efforts to collect receivables from a debtor in bankruptcy, employment matters including but not limited to, claims of wrongful termination, retaliation, discrimination, harassment and wage and hour claims, whistleblower 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
$13 million
and
$14 million
as of
June 30, 2019
and
December 31, 2018
. Such reserves are exclusive of matters relating to the Company’s separation from Cendant and matters relating to the sale of the European vacations rentals business, which are discussed in
Note
22
—
Transactions with Former Parent and Former Subsidiaries
. For matters not requiring accrual, the Company believes that such matters will not have a material effect on its results of operations, financial position or cash flows based on information currently available.
However, litigation is inherently unpredictable and, although the Company believes that its accruals are adequate and/or that it has valid defenses in these matters, unfavorable results could occur. As such, an adverse outcome from such proceedings for which claims are awarded in excess of the amounts accrued, if any, could be material to the Company with respect to earnings and/or cash flows in any given reporting period. As of
June 30, 2019
, the potential exposure resulting from adverse outcomes of such legal proceedings could, in the aggregate, range up to
$48 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 and/or liquidity.
Other Guarantees and Indemnifications
Vacation Ownership
The Company has committed to repurchase completed property located in Las Vegas, Nevada from a third-party developer subject to such property meeting the Company’s vacation ownership resort standards and provided that the third-party developer has not sold such property to another party. See Note
8
—
Inventory
for additional details.
For information on guarantees and indemnifications related to the Company’s former parent and subsidiaries see Note
22
—
Transactions with Former Parent and Former Subsidiaries
.
17
.
Accumulated Other Comprehensive (Loss)/Income
The components of Accumulated Other Comprehensive (Loss)/Income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
Unrealized
|
|
Defined
|
|
Accumulated
|
|
Currency
|
|
(Losses)
|
|
Benefit
|
|
Other
|
|
Translation
|
|
on Cash Flow
|
|
Pension
|
|
Comprehensive
|
Pretax
|
Adjustments
|
|
Hedges
|
|
Plans
|
|
(Loss)/Income
|
Balance, December 31, 2018
|
$
|
(147
|
)
|
|
$
|
(2
|
)
|
|
$
|
2
|
|
|
$
|
(147
|
)
|
Other comprehensive income before
reclassifications
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Amount reclassified to earnings
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Balance, June 30, 2019
|
$
|
(146
|
)
|
|
$
|
(1
|
)
|
|
$
|
2
|
|
|
$
|
(145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
|
|
|
|
|
|
|
|
Balance, December 31, 2018
(a)
|
$
|
94
|
|
|
$
|
2
|
|
|
$
|
(1
|
)
|
|
$
|
95
|
|
Other comprehensive (loss) before
reclassifications
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
Amount reclassified to earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance, June 30, 2019
|
$
|
94
|
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
|
$
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of Tax
|
|
|
|
|
|
|
|
Balance, December 31, 2018
|
$
|
(53
|
)
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
(52
|
)
|
Other comprehensive income/(loss) before
reclassifications
|
1
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
Amount reclassified to earnings
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Balance, June 30, 2019
|
$
|
(52
|
)
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
(51
|
)
|
|
|
(a)
|
Includes impact of the Company’s early adoption of new accounting guidance in the fourth quarter of 2018 which allows for the reclassification of the stranded tax effects resulting from the implementation of the Tax Cuts and Jobs Act of 2017. This adoption resulted in an
$8 million
reclassification of tax benefit from AOCL to Retained Earnings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
Unrealized
|
|
Defined
|
|
Accumulated
|
|
Currency
|
|
(Losses)
|
|
Benefit
|
|
Other
|
|
Translation
|
|
on Cash Flow
|
|
Pension
|
|
Comprehensive
|
Pretax
|
Adjustments
|
|
Hedges
|
|
Plans
|
|
(Loss)/Income
|
Balance, December 31, 2017
|
$
|
(96
|
)
|
|
$
|
(2
|
)
|
|
$
|
(5
|
)
|
|
$
|
(103
|
)
|
Other comprehensive (loss)
|
(44
|
)
|
|
—
|
|
|
—
|
|
|
(44
|
)
|
Amount reclassified to earnings
|
24
|
|
|
1
|
|
|
5
|
|
|
30
|
|
Balance, June 30, 2018
|
$
|
(116
|
)
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
|
|
|
|
|
|
|
|
Balance, December 31, 2017
|
$
|
89
|
|
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
92
|
|
Other comprehensive income
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Amount reclassified to earnings
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
(2
|
)
|
Balance, June 30, 2018
|
$
|
90
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of Tax
|
|
|
|
|
|
|
|
Balance, December 31, 2017
|
$
|
(7
|
)
|
|
$
|
—
|
|
|
$
|
(4
|
)
|
|
$
|
(11
|
)
|
Other comprehensive (loss)
|
(43
|
)
|
|
—
|
|
|
—
|
|
|
(43
|
)
|
Amount reclassified to earnings
|
24
|
|
|
—
|
|
|
4
|
|
|
28
|
|
Balance, June 30, 2018
|
$
|
(26
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(26
|
)
|
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.
Reclassifications out of accumulated other comprehensive (loss)/income are presented in the following table. Amounts in parenthesis indicate debits to the Condensed Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Foreign currency translation adjustments, net
|
|
|
|
|
|
|
|
Gain on disposal of discontinued businesses, net of income taxes
|
$
|
—
|
|
|
$
|
(24
|
)
|
|
$
|
—
|
|
|
$
|
(24
|
)
|
Net income attributable to Wyndham Destinations shareholders
|
$
|
—
|
|
|
$
|
(24
|
)
|
|
$
|
—
|
|
|
$
|
(24
|
)
|
|
|
|
|
|
|
|
|
Unrealized losses on cash flow hedge, net
|
|
|
|
|
|
|
|
Gain on disposal of discontinued businesses, net of income taxes
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
Net income attributable to Wyndham Destinations shareholders
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plans, net
|
|
|
|
|
|
|
|
Gain on disposal of discontinued businesses, net of income taxes
|
$
|
—
|
|
|
$
|
(4
|
)
|
|
$
|
—
|
|
|
$
|
(4
|
)
|
Net income attributable to Wyndham Destinations shareholders
|
$
|
—
|
|
|
$
|
(4
|
)
|
|
$
|
—
|
|
|
$
|
(4
|
)
|
18
.
Stock-Based Compensation
The Company has a stock-based compensation plan available to grant RSUs, PSUs, SSARs, non-qualified stock options (“NQs”) and other stock-based awards to key employees, non-employee directors, advisors and consultants.
The Wyndham Worldwide Corporation 2006 Equity and Incentive Plan was originally adopted in 2006 and was amended and restated in its entirety and approved by shareholders on May 17, 2018 (the “Amended and Restated Equity Incentive Plan”). Under the Amended and Restated Equity Incentive Plan, a maximum of
15.7 million
shares of common stock may be awarded. As of
June 30, 2019
,
13.8 million
shares remain available.
Incentive Equity Awards Granted by the Company
During the
six months ended
June 30, 2019
, the Company granted incentive equity awards to key employees and senior officers totaling
$25 million
in the form of RSUs,
$7 million
in the form of PSUs and
$5 million
in the form of stock options. Of these awards, the NQs and majority of RSUs will vest ratably over a period of
4 years
, and the PSUs will cliff vest on the third anniversary of the grant date; contingent upon the Company achieving certain performance metrics.
The activity related to incentive equity awards granted to the Company’s key employees and senior officers by the Company for the
six months ended
June 30, 2019
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2018
|
|
Granted
|
|
Vested/Exercised
|
|
Balance,
June 30, 2019
(a)
|
|
RSUs
|
|
|
|
|
|
|
|
|
|
Number of RSUs
|
|
0.9
|
|
|
0.5
|
|
|
(0.2
|
)
|
|
1.2
|
|
(b)
|
Weighted average grant price
|
|
$
|
50.54
|
|
|
$
|
44.38
|
|
|
$
|
50.06
|
|
|
$
|
47.89
|
|
|
|
|
|
|
|
|
|
|
|
|
PSUs
|
|
|
|
|
|
|
|
|
|
Number of PSUs
|
|
—
|
|
|
0.2
|
|
|
—
|
|
|
0.2
|
|
(c)
|
Weighted average grant price
|
|
$
|
—
|
|
|
$
|
44.38
|
|
|
$
|
—
|
|
|
$
|
44.38
|
|
|
|
|
|
|
|
|
|
|
|
|
SSARs
|
|
|
|
|
|
|
|
|
|
Number of SSARs
|
|
0.2
|
|
|
—
|
|
|
—
|
|
|
0.2
|
|
(d)
|
Weighted average grant price
|
|
$
|
34.24
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
34.24
|
|
|
|
|
|
|
|
|
|
|
|
|
NQs
|
|
|
|
|
|
|
|
|
|
Number of NQs
|
|
0.8
|
|
|
0.6
|
|
|
—
|
|
|
1.4
|
|
(e)
|
Weighted average grant price
|
|
$
|
48.71
|
|
|
$
|
44.38
|
|
|
$
|
—
|
|
|
$
|
46.84
|
|
|
|
|
(a)
|
The Company recognizes forfeitures as they occur. The number of forfeitures during the six months ended
June 30, 2019
was immaterial.
|
|
|
(b)
|
Aggregate unrecognized compensation expense related to RSUs was
$48 million
as of
June 30, 2019
, which is expected to be recognized over a weighted average period of
3.3 years
.
|
|
|
(c)
|
Maximum aggregate unrecognized compensation expense related to PSUs was
$6 million
as of
June 30, 2019
, which is expected to be recognized over a weighted average period of
3.7 years
|
|
|
(d)
|
There were
0.2 million
SSARs that were exercisable as of
June 30, 2019
. There was
no
unrecognized compensation expense related to SSARs as of
June 30, 2019
as all SSARs were vested.
|
|
|
(e)
|
Unrecognized compensation expense for NQs was
$9 million
as of
June 30, 2019
, which is expected to be recognized over a period of
3.3 years
.
|
The fair value of stock options granted by the Company during 2019 was estimated on the date of this grant using the Black-Scholes option-pricing model with the relevant weighted average assumptions outlined in the table below. Expected volatility was based on both historical and implied volatilities of the Company’s stock and the stock of comparable companies over the estimated expected life for options. The expected life represents the period of time these awards are expected to be outstanding. The-risk free interest rate is based on yields on U.S. Treasury strips with a maturity similar to the estimated expected life of the options. The projected dividend yield was based on the Company’s anticipated annual dividend divided by the price of the Company’s stock on the date of the grant.
|
|
|
|
|
|
Stock Options
|
|
2019
|
Grant date fair value
|
|
$
|
8.98
|
|
Grant date strike price
|
|
$
|
44.38
|
|
Expected volatility
|
|
29.97
|
%
|
Expected life
|
|
6.3 years
|
|
Risk-free interest rate
|
|
2.59
|
%
|
Stock-Based Compensation Expense
The Company recorded stock-based compensation expense of
$7 million
and
$12 million
during the
three and six months ended June 30, 2019
and
$110 million
and
$131 million
during the
three and six months ended June 30, 2018
, related to incentive equity awards granted to key employees, senior officers and non-employee directors. Such stock-based compensation expense included expense related to discontinued operations of
$19 million
and
$22 million
for the
three and six months ended
June 30, 2018
, respectively. Stock-based compensation expense of
$2 million
and
$4 million
for the
three and six months ended
June 30, 2019
, and
$87 million
and
$92 million
for the three and six months ended
June 30, 2018
, respectively, has been classified within Separation and related costs within continuing operations.
The Company paid
$1 million
and
$67 million
of taxes for the net share settlement of incentive equity awards that vested during the
six months ended
June 30, 2019
and
2018
, respectively.
Employee Stock Purchase Plan
During 2019, the Company implemented an employee stock purchase plan. This plan allows eligible employees to purchase common shares of company stock through payroll deductions at a
ten
percent discount off the fair market value at the grant date. The Company issued
0.1 million
shares and recognized less than
$1 million
of compensation expense related to the first grant under this plan in June 2019.
The Company has two operating segments: Vacation Ownership and Exchange & Rentals. The Vacation Ownership segment 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. The Exchange & Rentals segment provides vacation exchange services and products to owners of VOIs and manages and markets vacation rental properties primarily on behalf of independent owners. During 2018, the Company decided to explore strategic alternatives for its North American vacation rentals business, which is currently part of its Exchange & Rentals segment. The assets and liabilities of this business have been classified as held-for-sale. The reportable segments presented below represent the Company’s operating segments for which discrete financial information is available and which are 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 uses net revenues and Adjusted EBITDA to assess the performance of the reportable segments. Adjusted EBITDA is defined by the Company 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. Adjusted EBITDA also excludes stock-based compensation costs, separation and restructuring costs, transaction costs, impairments, and items that meet the conditions of unusual and/or infrequent.
The Company believes that Adjusted EBITDA is a useful measure of performance for its segments which, when considered with GAAP measures, the Company believes gives a more complete understanding of its operating performance. The Company’s presentation of Adjusted EBITDA may not be comparable to similarly-titled measures used by other companies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
Net revenues
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Vacation Ownership
|
$
|
810
|
|
|
$
|
770
|
|
|
$
|
1,493
|
|
|
$
|
1,431
|
|
Exchange & Rentals
|
230
|
|
|
238
|
|
|
466
|
|
|
484
|
|
Total reportable segments
|
1,040
|
|
|
1,008
|
|
|
1,959
|
|
|
1,915
|
|
Corporate and other
(a)
|
(1
|
)
|
|
(1
|
)
|
|
(2
|
)
|
|
(1
|
)
|
Total Company
|
$
|
1,039
|
|
|
$
|
1,007
|
|
|
$
|
1,957
|
|
|
$
|
1,914
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
Reconciliation of Net income to Adjusted EBITDA
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net income attributable to Wyndham Destinations shareholders
|
$
|
124
|
|
|
$
|
378
|
|
|
$
|
204
|
|
|
$
|
412
|
|
Loss from operations of discontinued businesses, net of income taxes
|
—
|
|
|
42
|
|
|
—
|
|
|
49
|
|
Gain on disposal of discontinued businesses, net of income taxes
|
(6
|
)
|
|
(432
|
)
|
|
(5
|
)
|
|
(432
|
)
|
Provision for income taxes
|
44
|
|
|
38
|
|
|
74
|
|
|
62
|
|
Depreciation and amortization
|
28
|
|
|
36
|
|
|
59
|
|
|
73
|
|
Interest expense
|
40
|
|
|
46
|
|
|
82
|
|
|
91
|
|
Interest (income)
|
(2
|
)
|
|
(2
|
)
|
|
(4
|
)
|
|
(3
|
)
|
Separation and related costs
(b)
|
22
|
|
|
133
|
|
|
36
|
|
|
163
|
|
Restructuring
|
1
|
|
|
—
|
|
|
4
|
|
|
—
|
|
Legacy items
|
(1
|
)
|
|
—
|
|
|
1
|
|
|
—
|
|
Stock-based compensation
|
5
|
|
|
4
|
|
|
8
|
|
|
17
|
|
Adjusted EBITDA
|
$
|
255
|
|
|
$
|
243
|
|
|
$
|
459
|
|
|
$
|
432
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
Adjusted EBITDA
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Vacation Ownership
|
$
|
193
|
|
|
$
|
194
|
|
|
$
|
331
|
|
|
$
|
327
|
|
Exchange & Rentals
|
72
|
|
|
70
|
|
|
151
|
|
|
149
|
|
Total reportable segments
|
265
|
|
|
264
|
|
|
482
|
|
|
476
|
|
Corporate and other
(a)
|
(10
|
)
|
|
(21
|
)
|
|
(23
|
)
|
|
(44
|
)
|
Total Company
|
$
|
255
|
|
|
$
|
243
|
|
|
$
|
459
|
|
|
$
|
432
|
|
|
|
(a)
|
Includes the elimination of transactions between segments.
|
|
|
(b)
|
Includes
$2 million
and
$4 million
of stock based compensation expenses for the
three and six months ended
June 30, 2019
and
$87 million
and
$92 million
for the
three and six months ended
June 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets
(a)
|
|
|
June 30,
2019
|
|
December 31, 2018
|
Vacation Ownership
|
|
|
$
|
5,565
|
|
|
$
|
5,421
|
|
Exchange & Rentals
|
|
|
1,409
|
|
|
1,376
|
|
Total reportable segments
|
|
|
6,974
|
|
|
6,797
|
|
Corporate and other
|
|
|
220
|
|
|
158
|
|
Assets held-for-sale
|
|
|
272
|
|
|
203
|
|
Total Company
|
|
|
$
|
7,466
|
|
|
$
|
7,158
|
|
|
|
(a)
|
Excludes investment in consolidated subs.
|
|
|
20
.
|
Separation and Transaction Costs
|
During the
three and six months ended
June 30, 2019
, the Company incurred
$22 million
and
$36 million
of expenses in connection with the spin-off of the hotel business completed on May 31, 2018 which are reflected within continuing operations. These Spin-off related costs were related to stock compensation modification, severance and other employee costs, as well as impairment charges due to the write-off of right-of-use assets and furniture, fixtures and equipment as a result of the Company abandoning portions of its former corporate headquarters. This decision was part of the Company’s continued focus on rationalizing existing facilities in order to reduce its corporate footprint.
During the
three and six months ended
June 30, 2018
, the Company incurred
$133 million
and
$163 million
of expenses, respectively, in connection with the spin-off of the hotel business which are reflected in continuing operations. These costs were comprised of stock compensation modification expense, severance and other employee costs offset, in part, by favorable foreign currency. In addition, these costs include certain impairment charges related to the separation including property sold to Wyndham Hotels.
Additionally, during the
three and six months ended
June 30, 2018
, the Company incurred
$72 million
and
$93 million
of separation-related expenses, respectively, in connection with the Spin-off and sale of the European vacation rentals business which are reflected within discontinued operations. These expenses include legal, consulting and auditing fees, stock compensation modification expense, severance, and other employee-related costs.
2018 Restructuring Plans
During the fourth quarter of 2018, the Company recorded
$16 million
of charges related to restructuring initiatives, all of which are personnel-related resulting from a reduction of approximately
500
employees. This action was primarily focused on enhancing organizational efficiency and rationalizing operations. The charges consisted of (i)
$11 million
at the Vacation Ownership segment, (ii)
$4 million
at the Exchange & Rentals segment, and (iii)
$1 million
at the Company’s corporate operations. During 2018, the Company reduced its restructuring liability by
$4 million
of cash payments. During the six months ended June 30, 2019, the Company incurred an additional
$2 million
of restructuring expenses at its corporate operations and an additional
$2 million
at its Vacation Ownership segment.
The Company reduced its restructuring liability by
$8 million
of cash payments during the
six months ended
June 30, 2019
. The remaining 2018 restructuring liability of
$8 million
is expected to be paid by the end of 2020.
The Company has additional restructuring plans which were implemented prior to
2018
. The remaining liability of less than
$1 million
as of
June 30, 2019
is related to leased facilities and is expected to be paid by 2020.
The activity associated with the Company’s restructuring plans is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability as of
|
|
|
|
|
|
Liability as of
|
|
December 31, 2018
|
|
Costs Recognized
|
|
Cash Payments
|
|
June 30, 2019
|
Personnel-related
|
$
|
12
|
|
|
$
|
4
|
|
|
$
|
(8
|
)
|
|
$
|
8
|
|
|
$
|
12
|
|
|
$
|
4
|
|
|
$
|
(8
|
)
|
|
$
|
8
|
|
|
|
22
.
|
Transactions with Former Parent and Former Subsidiaries
|
Matters Related to Cendant
Pursuant to the Cendant Separation and Distribution Agreement, the Company entered into certain guarantee commitments with Cendant and Cendant’s former subsidiary, Realogy. These guarantee arrangements primarily relate to certain contingent litigation liabilities, contingent tax liabilities, and Cendant contingent and other corporate liabilities, of which Wyndham Worldwide Corporation (“Wyndham Worldwide”) assumed
37.5%
of the responsibility while Cendant’s former subsidiary, Realogy, is responsible for the remaining
62.5%
. As a result of the Wyndham Worldwide separation, Wyndham Hotels agreed to retain one-third of Cendant’s contingent and other corporate liabilities and associated costs; therefore, Wyndham Destinations is effectively responsible for
25%
of such matters subsequent to the separation. Since Cendant’s separation, Cendant settled the majority of the lawsuits pending on the date of the separation.
As of
June 30, 2019
, the Cendant separation and related liabilities of
$14 million
are comprised of
$12 million
for tax liabilities and
$2 million
for other contingent and corporate liabilities. These liabilities were recorded within Accrued expenses and other liabilities on the Condensed Consolidated Balance Sheet. As of
December 31, 2018
, the Company had
$18 million
of Cendant separation-related liabilities, which were recorded within Accrued expenses and other liabilities on the Condensed Consolidated Balance Sheet.
Matters Related to Wyndham Hotels
In connection with the spin-off of the hotel business on May 31, 2018, Wyndham Destinations entered into several agreements with Wyndham Hotels that govern the relationship of the parties following the distribution including the Separation and Distribution Agreement, the Employee Matters Agreements, the Tax Matters Agreement, the Transition Services Agreement and the License, Development and Noncompetition Agreement.
In accordance with these agreements, Wyndham Destinations assumed two-thirds and Wyndham Hotels assumed one-third of certain contingent corporate liabilities of the Company incurred prior to the distribution, including liabilities of the Company related to certain terminated or divested businesses, certain general corporate matters, and any actions with respect to the separation plan. Likewise, Wyndham Destinations is entitled to receive two-thirds and Wyndham Hotels is entitled to receive one-third of the proceeds from certain contingent corporate assets of the Company arising or accrued prior to the distribution.
Wyndham Destinations entered into a transition service agreement with Wyndham Hotels, pursuant to which the companies agreed to provide each other certain transitional services including human resources, facilities, payroll, tax, information technology, information management and related services, treasury, finance, sourcing, and employee benefits administration on an interim, transitional basis. During the
three and six months ended
June 30, 2019
, transition service agreement expenses were
$1 million
and
$2 million
, included in General and administrative expense, and less than
$1 million
and
$1 million
, included in Separation expense. Transition service agreement income during the
three and six months ended
June 30, 2019
was less than
$1 million
and
$1 million
, included in Other Revenue. For both the
three and six months ended
June 30, 2018
, transition service agreement expenses were
$1 million
and transition service agreement income was
$1 million
.
Matters Related to the European Vacation Rentals Business
In connection with the sale of the Company’s European vacation rentals business, the Company and Wyndham Hotels agreed to certain post-closing credit support for the benefit of certain credit card service providers, a British travel association, and certain regulatory authorities to allow them to continue providing services or regulatory approval to the business. Post-closing credit support may be called if the business fails to meet its primary obligation to pay amounts when due. Compass IV Limited, an affiliate of Platinum Equity, LLC (“Buyer”) has provided an indemnification to Wyndham Destinations in the event that the post-closing credit support is enforced or called upon. Such post-closing credit support included a guarantee of up to
$180 million
which expired June 30, 2019, and had an estimated fair value of
$2 million
prior to expiration.
At closing, the Company agreed to provide additional post-closing credit support to a British travel association and regulatory authority. An escrow was established at closing, of which
$46 million
was subsequently released in exchange for a secured bonding facility and a perpetual guarantee of
$46 million
. The estimated fair value of the guarantee was
$22 million
as of
June 30, 2019
. The Company established a
$7 million
receivable from Wyndham Hotels for its portion of the guarantee.
In January 2019, the Company reached an agreement with the Buyer on certain post-closing adjustments, resulting in a reduction of proceeds by
$27 million
. In accordance with the separation agreement, the Company and Wyndham Hotels agreed to share two–thirds and one–third, respectively, in the European vacation rentals business' final net proceeds (as defined by the sales agreement), adjusted for certain items including the return of the escrow, post–closing adjustments, transaction expenses and estimated taxes. The Company paid
$40 million
to Wyndham Hotels in the second quarter of 2019.
The Company also deposited
$5 million
into an escrow account for which all obligations ceased to exist on May 9, 2019. The escrow was returned to the Company in May 2019.
In addition, the Company agreed to indemnify the Buyer against certain claims and assessments, including income tax, value-added tax and other tax matters, related to the operations of the European vacation rentals business for the periods prior to the transaction. The estimated fair value of the indemnifications increased by
$2 million
to a total of
$45 million
at
June 30, 2019
. The Company has a
$15 million
receivable from Wyndham Hotels for its portion of the guarantee.
Wyndham Hotels provided certain post-closing credit support primarily for the benefit of a British travel association in the form of guarantees which are primarily denominated in pound sterling of up to an approximate
$81 million
on a perpetual basis. The estimated fair value of such guarantees was
$39 million
at
June 30, 2019
. Wyndham Destinations is responsible for two-thirds of these guarantees. Wyndham Hotels is required to maintain minimum credit ratings of Ba2 for Moody’s Investors Service and BB for Standard & Poor’s Rating Services. If Wyndham Hotels drops below these minimum credit ratings, Wyndham Destinations would be required to post a letter of credit (or equivalent support) for the amount of the Wyndham Hotels guarantee.
The estimated fair value of the guarantees and indemnifications for which Wyndham Destinations is responsible related to the sale of the European vacation rentals business, including the two-thirds portion related to guarantees provided by Wyndham Hotels, totaled
$95 million
and was recorded in Accrued expenses and other liabilities at
June 30, 2019
. Total receivables of
$23 million
were included in Other assets at
June 30, 2019
representing the portion of these guarantees and indemnifications for which Wyndham Hotels is responsible. The total change in expired guarantees and returned escrow offset by increased tax liabilities increased the gain on sale of the European vacation rentals business by
$6 million
during the second quarter of 2019.
During the second quarter of 2019, Compass IV Limited, an affiliate of Platinum Equity, LLC, proposed certain post-closing adjustments of approximately
$44 million
which could serve to reduce the net consideration received from the sale of the European vacation rentals business. While the Company intends to vigorously dispute these proposed adjustments, at this time we cannot reasonably estimate the probability or amount of the potential liability owed to Compass IV Limited, if any. Any actual liability would be split two-thirds and one-third between the Company and Wyndham Hotels, respectively, and the impact would be included in discontinued operations.
Wyndham Destinations entered into a transition service agreement with the European vacation business, pursuant to which the companies agreed to provide each other certain transitional services including human resources, facilities, payroll, tax, information technology, information management and related services, treasury, finance, and sourcing on an interim, transitional basis. During the
three and six months ended
June 30, 2019
, transition service agreement expenses were less than
$1 million
and
$1 million
and transition service agreement income was less than
$1 million
and
$1 million
. For both the
three and six months ended
June 30, 2018
, transition service agreement expenses were
$2 million
and transition service agreement income was
$2 million
. Transition service agreement expenses were included in General and administrative expense and transition service income was included in Other Revenue.
23
.
Related Party Transactions
In March 2019, the Company entered into an agreement with a former executive of the Company whereby the former executive through an SPE would develop and construct VOI inventory located in Orlando, FL. Subject to the property meeting the Company’s vacation ownership resort standards and provided that the property has not been sold to another party, the maximum potential future payments that the Company may be required to make under this commitment is
$45 million
.
Sierra Timeshare 2019-2 Receivables Funding LLC
On July 24, 2019, the Company closed on a placement of a series of term notes payable, issued by Sierra Timeshare 2019-2 Receivables Fundings LLC, with an initial principal amount of
$450 million
, which are secured by vacation ownership contract receivables and bear interest at a weighted average coupon rate of
2.96%
. The advance rate for this transaction was
98.00%
.
North American Vacation Rentals Business
On July 30, 2019, the Company announced the sale of its North American vacation rentals business to Vacasa LLC (“Vacasa”) for
$162 million
. The sale will be comprised of
$45 million
cash at closing, up to
$30 million
of Vacasa equity, and the remaining balance in either seller financing or cash at closing. The transaction is expected to close in the fall of 2019, subject to customary closing conditions, regulatory approval, and the timely completion of financing arrangements by Vacasa.