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
On January 5, 2021, Wyndham Destinations, Inc. acquired the Travel + Leisure brand and related assets from Meredith Corporation. The aggregate purchase price was $100 million, of which $35 million was paid at closing with an additional $20 million paid during the second quarter of 2021. The remaining payments are to be completed by June 2024. In connection with this acquisition, Wyndham Destinations, Inc. changed its name to Travel + Leisure Co. and its ticker symbol to TNL on February 17, 2021.
Travel + Leisure Co. and its subsidiaries (collectively, “Travel + Leisure,” or the “Company,” formerly Wyndham Destinations, Inc.) is a global provider of hospitality services and travel products. The Company operates in two segments: Vacation Ownership (formerly Wyndham Vacation Clubs) and Travel and Membership (formerly Panorama or Vacation Exchange). In connection with the Travel + Leisure brand acquisition the Company updated the names and composition of its reportable segments to better align with how the segments are managed.
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. This segment is wholly comprised of the Wyndham Destinations business line, formerly Wyndham Vacation Clubs. The following brands operate under the Wyndham Destinations business line: Club Wyndham, WorldMark by Wyndham, Shell Vacations Club, Margaritaville Vacation Club by Wyndham, and Presidential Reserve by Wyndham.
The Travel and Membership segment operates a variety of travel businesses, including three vacation exchange brands, a home exchange network, travel technology platforms, travel memberships, and direct-to-consumer rentals. This segment is comprised of the Panorama and new Travel + Leisure Group business lines. With the formation of Travel + Leisure Group, the Company decided that the operations of its Extra Holidays business, which focuses on direct to consumer bookings, better aligns with the operations of this new business line and therefore transitioned the management of the Extra Holidays business to the Travel and Membership segment. As such, the Company reclassified the results of its Extra Holidays business, which was previously reported within the Vacation Ownership segment, into the Travel and Membership segment. Prior period segment information has been restated to reflect this change. The following brands operate under the Panorama business line: RCI, Panorama Travel Solutions, Alliance Reservations Network (“ARN”), 7Across, The Registry Collection, and Love Home Swap. The Travel + Leisure Group operates the BookTandL.com, Travel + Leisure Travel Clubs, and Extra Holidays brands.
Impact of COVID-19
The results of operations for the three and six months ended June 30, 2021 and 2020 include impacts related to the novel coronavirus global pandemic (“COVID-19”), which have been significantly negative for the travel industry, the Company, its customers, and employees. In response to COVID-19, the Vacation Ownership segment temporarily closed its resorts in mid-March 2020 across the globe and suspended its sales and marketing operations. In the Travel and Membership segment, affiliate resort closures and regional travel restrictions contributed to decreased bookings and increased cancellations. As a result, the Company significantly reduced its workforce and furloughed thousands of associates in the second quarter of 2020. As of June 30, 2021, the Company has reopened 96% of its resorts and 95% of the sales offices it expects to reopen. The Company estimates that the remaining suspended resorts and sales offices that it intends to reopen will resume operations in 2021. As a result of these reopenings the majority of the Company’s furloughed employees have returned to work.
As a precautionary measure to enhance liquidity, in the first quarter of 2020 the Company drew down its $1.0 billion revolving credit facility and suspended its share repurchase activity, and in the third quarter of 2020 amended its revolving credit facility and term loan B, which provides flexibility during the relief period spanning from July 15, 2020 through April 1, 2022, or upon earlier termination by the Company. The Company has since repaid its $1.0 billion revolving credit facility. See Note 10—Debt for additional details.
Given these significant events, the Company’s revenues were negatively impacted and while revenues have begun to recover, not all product and service lines have yet reached pre-pandemic levels. The Company reversed $15 million of COVID-19 charges primarily related to the COVID-19 related allowance for loan losses on vacation ownership contract
receivables during the three and six months ended June 30, 2021, compared to $106 million and $346 million of charges incurred for the same periods last year. The $15 million of net reversals was primarily due to a $26 million reduction in the COVID-19 related loan loss provision recorded in the prior year. This provision was released as the Company is experiencing improvements in net new defaults. In connection with this provision release the Company also recorded $10 million of cost of vacation ownership interests representing the associated reduction in estimated recoveries. Refer to Note 20—COVID-19 Related Items for additional details.
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q include the accounts and transactions of Travel + Leisure, as well as the entities in which Travel + Leisure directly or indirectly has a controlling financial interest. The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with Generally Accepted Accounting Principles in the U.S. (“GAAP”). All intercompany balances and transactions have been eliminated in the Condensed Consolidated Financial Statements. In addition, prior period segment results have been restated to reflect the aforementioned reclassification of the Extra Holidays business into the Travel and Membership segment.
The Company presents an unclassified balance sheet which conforms to that of the Company’s peers and industry practice.
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 and assumptions. 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 2020 Consolidated Financial Statements included in its Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 24, 2021.
2. New Accounting Pronouncements
Recently Issued Accounting Pronouncements
Reference Rate Reform. In March 2020, the Financial Accounting Standards Board (“FASB”) issued guidance, amended in January 2021, which provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. This guidance became effective on March 12, 2020, and will apply through December 31, 2022. The transition from LIBOR based benchmark is expected to begin January 1, 2022 and to be completed when U.S. Dollar (“USD”) LIBOR rates are phased out by June 30, 2023. The Company is currently evaluating the impact of the transition from LIBOR on its financial statements and related disclosures and the related impact of this guidance on the transition. On October 27, 2020, the Company closed on the renewal of its USD bank conduit facility and adopted appropriate LIBOR disclosures for asset-backed securities (“ABS”) financing structures as part of the renewal. The Company intends to adopt such language, as appropriate, in its other relevant agreements prior to the end of 2021.
Recently Adopted Accounting Pronouncements
Simplifying the Accounting for Income Taxes. In December 2019, the FASB issued guidance to simplify the accounting for income taxes and clarify the financial statement presentation for tax benefits related to tax deductible dividends. This guidance became effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The adoption of this guidance did not have a material impact on the Company’s Condensed Consolidated Financial Statements and related disclosures.
3. Revenue Recognition
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 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/(Loss). 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/(Loss). Property management revenues, which are comprised of management fee revenue and reimbursable revenue were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2021
|
|
2020 (a)
|
|
2021
|
|
2020 (a)
|
Management fee revenues
|
$
|
91
|
|
|
$
|
73
|
|
|
$
|
179
|
|
|
$
|
166
|
|
Reimbursable revenues
|
70
|
|
|
49
|
|
|
139
|
|
|
126
|
|
Property management revenues
|
$
|
161
|
|
|
$
|
122
|
|
|
$
|
318
|
|
|
$
|
292
|
|
(a)Reflects the impact of reclassifying the Extra Holidays business line from the Vacation Ownership segment to Travel and Membership.
One of the associations that the Company manages paid its Travel and Membership segment $7 million and $6 million for exchange services during the three months ended June 30, 2021 and 2020, and $14 million and $13 million during six months ended June 30, 2021 and 2020.
Travel and Membership
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 network and, for some members, for other leisure-related services and products.
Travel and Membership derives 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 travel-related products and services. Estimated net contract consideration payable by affiliated clubs for memberships is 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. The Company also derives revenue from facilitating bookings of travel accommodations for both members and non-members. Revenue is recognized when these transactions have been confirmed, net of expected cancellations.
The Company’s vacation exchange business also derives revenues from programs with affiliated resorts, club servicing, and loyalty programs; and 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, event, or other related transaction.
The Company also derives revenue from other travel products and services, enabled as a result of the 2019 acquisition of ARN and via the Company’s resort services solution business, optimizing business to business (“B2B”) capabilities, and integration for consumer travel planning. The Company’s relationships and buying power with major travel suppliers provide its partners with access to exclusive travel inventory. The Company’s affiliates and members have access to inventory from accommodation wholesalers, airfare, and rental car providers.
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.
Other Items
The Company records property management services revenues and RCI Elite Rewards revenues for its Vacation Ownership and Travel and Membership segments gross as a principal.
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, 2021 and December 31, 2020, were as follows (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2021
|
|
December 31, 2020
|
Deferred subscription revenue
|
|
$
|
178
|
|
|
$
|
176
|
|
Deferred VOI trial package revenue
|
|
101
|
|
|
115
|
|
Deferred exchange-related revenue (a)
|
|
63
|
|
|
59
|
|
Deferred VOI incentive revenue
|
|
61
|
|
|
74
|
|
Deferred co-branded credit card programs revenue
|
|
13
|
|
|
16
|
|
Deferred other revenue
|
|
3
|
|
|
8
|
|
Total
|
|
$
|
419
|
|
|
$
|
448
|
|
(a)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 Sheets.
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 Travel and Membership business, deferred subscription revenue represents billings and payments received in advance from members and affiliated clubs for memberships in the Company’s travel programs which are recognized in future periods. Deferred revenue primarily represents payments received in advance from members for the right to access the Company’s vacation travel network to book vacation exchanges, rent travel accommodations, and for other leisure-related services and products which are generally recognized as revenue within one year.
Changes in contract liabilities for the six months ended June 30, 2021 and 2020, follow (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
Beginning balance
|
|
$
|
448
|
|
|
$
|
539
|
|
Additions
|
|
145
|
|
|
145
|
|
Revenue recognized
|
|
(174)
|
|
|
(149)
|
|
|
|
|
|
|
Ending balance
|
|
$
|
419
|
|
|
$
|
535
|
|
Capitalized Contract Costs
The Company’s Vacation Ownership segment 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. As of June 30, 2021 and December 31, 2020, these capitalized costs were $34 million and $41 million and are included within Other assets on the Condensed Consolidated Balance Sheets.
The Company’s Travel and Membership segment incurs certain direct and incremental selling costs to obtain contracts with customers in connection with subscription revenues and exchange–related 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, 2021 and December 31, 2020, these capitalized costs were $17 million and $16 million; and are included within Other assets on the Condensed Consolidated Balance Sheets.
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.
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 12-month periods set forth below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/1/2021 - 6/30/2022
|
|
7/1/2022 - 6/30/2023
|
|
7/1/2023 - 6/30/2024
|
|
Thereafter
|
|
Total
|
Subscription revenue
|
|
$
|
106
|
|
|
$
|
37
|
|
|
$
|
18
|
|
|
$
|
17
|
|
|
$
|
178
|
|
VOI trial package revenue
|
|
101
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
101
|
|
Exchange-related revenue
|
|
59
|
|
|
3
|
|
|
1
|
|
|
—
|
|
|
63
|
|
VOI incentive revenue
|
|
61
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
61
|
|
Co-branded credit card programs revenue
|
|
3
|
|
|
3
|
|
|
3
|
|
|
4
|
|
|
13
|
|
Other revenue
|
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
Total
|
|
$
|
333
|
|
|
$
|
43
|
|
|
$
|
22
|
|
|
$
|
21
|
|
|
$
|
419
|
|
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 (in millions)(a):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Vacation Ownership
|
|
|
|
|
|
|
|
Vacation ownership interest sales (b)
|
$
|
294
|
|
|
$
|
(13)
|
|
|
$
|
466
|
|
|
$
|
77
|
|
Property management fees and reimbursable revenues
|
161
|
|
|
122
|
|
|
318
|
|
|
292
|
|
Consumer financing
|
102
|
|
|
119
|
|
|
201
|
|
|
246
|
|
Fee-for-Service commissions
|
29
|
|
|
—
|
|
|
41
|
|
|
3
|
|
Ancillary revenues
|
13
|
|
|
10
|
|
|
22
|
|
|
23
|
|
Total Vacation Ownership
|
599
|
|
|
238
|
|
|
1,048
|
|
|
641
|
|
|
|
|
|
|
|
|
|
Travel and Membership
|
|
|
|
|
|
|
|
Transaction revenues
|
153
|
|
|
44
|
|
|
285
|
|
|
140
|
|
Subscription revenues
|
43
|
|
|
33
|
|
|
84
|
|
|
77
|
|
Ancillary revenues
|
8
|
|
|
29
|
|
|
18
|
|
|
48
|
|
Total Travel and Membership
|
204
|
|
|
106
|
|
|
387
|
|
|
265
|
|
|
|
|
|
|
|
|
|
Corporate and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eliminations
|
(6)
|
|
|
(1)
|
|
|
(10)
|
|
|
(5)
|
|
Total Corporate and other
|
(6)
|
|
|
(1)
|
|
|
(10)
|
|
|
(5)
|
|
|
|
|
|
|
|
|
|
Net revenues
|
$
|
797
|
|
|
$
|
343
|
|
|
$
|
1,425
|
|
|
$
|
901
|
|
(a)This table reflects the reclassification of Extra Holidays from the Vacation Ownership segment into the Travel and Membership segment for all periods presented. Extra Holidays revenue is included within Transaction revenues.
(b)The Company recorded a COVID-19 related provision for loan losses of $225 million in the first quarter of 2020, due to an expected increase in defaults driven by higher unemployment associated with COVID-19, which is reflected as a reduction to Vacation ownership interest sales on the Condensed Consolidated Statements of Income/(Loss) during the six months ended June 30, 2020. During the second quarter of 2021, the Company analyzed the adequacy of this COVID-19 related provision consistent with past methodology, resulting in a $26 million reversal which is reflected as an increase in Vacation ownership interest sales on the Condensed Consolidated Statements of Income/(Loss) during the three and six months ended June 30, 2021.
4. Earnings/(Loss) Per Share
The computations of basic and diluted earnings/(loss) per share (“EPS”) are based on Net income/(loss) attributable to Travel + Leisure shareholders divided by the basic weighted average number of common shares and diluted weighted average number of common shares outstanding. The following table sets forth the computations of basic and diluted EPS (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Net income/(loss) from continuing operations attributable to Travel + Leisure shareholders
|
$
|
74
|
|
|
$
|
(164)
|
|
|
$
|
102
|
|
|
$
|
(298)
|
|
|
|
|
|
|
|
|
|
Loss on disposal of discontinued business attributable to Travel + Leisure shareholders, net of income taxes
|
(2)
|
|
|
—
|
|
|
(2)
|
|
|
—
|
|
Net income/(loss) attributable to Travel + Leisure shareholders
|
$
|
72
|
|
|
$
|
(164)
|
|
|
$
|
100
|
|
|
$
|
(298)
|
|
|
|
|
|
|
|
|
|
Basic earnings/(loss) per share (a)
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.85
|
|
|
$
|
(1.92)
|
|
|
$
|
1.18
|
|
|
$
|
(3.46)
|
|
Discontinued operations
|
(0.02)
|
|
|
—
|
|
|
(0.02)
|
|
|
—
|
|
|
$
|
0.83
|
|
|
$
|
(1.92)
|
|
|
$
|
1.16
|
|
|
$
|
(3.46)
|
|
Diluted earnings/(loss) per share (a)
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.84
|
|
|
$
|
(1.92)
|
|
|
$
|
1.17
|
|
|
$
|
(3.46)
|
|
Discontinued operations
|
(0.02)
|
|
|
—
|
|
|
(0.02)
|
|
|
—
|
|
|
$
|
0.82
|
|
|
$
|
(1.92)
|
|
|
$
|
1.15
|
|
|
$
|
(3.46)
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
86.5
|
|
|
85.4
|
|
|
86.4
|
|
|
86.1
|
|
RSUs,(b) PSUs (c) and NQs (d)
|
0.9
|
|
|
—
|
|
|
0.7
|
|
|
—
|
|
Diluted weighted average shares outstanding (e)
|
87.4
|
|
|
85.4
|
|
|
87.1
|
|
|
86.1
|
|
|
|
|
|
|
|
|
|
Dividends:
|
|
|
|
|
|
|
|
Aggregate dividends paid to shareholders
|
$
|
27
|
|
|
$
|
43
|
|
|
$
|
53
|
|
|
$
|
86
|
|
(a)Earnings/(loss) per share amounts are calculated using whole numbers.
(b)Excludes 1.6 million and 1.4 million of anti-dilutive restricted stock units (“RSUs”) for the three and six months ended June 30, 2020, of which 0.4 million and 0.3 million would have been dilutive had the Company not been in a net loss position during these periods. These shares could potentially dilute EPS in the future.
(c)Excludes performance-vested restricted stock units (“PSUs”) of 0.4 million for both the three and six months ended June 30, 2021, as the Company had not met the required performance metrics. Excludes 0.3 million PSUs for both the three and six months ended June 30, 2020, as the Company has not met the required performance metrics. These PSUs could potentially dilute EPS in the future.
(d)Excludes 1.4 million of outstanding non-qualified stock option (“NQs”) awards that would have been anti-dilutive to EPS for both the three and six months ended June 30, 2021. Excludes 2.4 million and 2.0 million of outstanding awards that would have been anti-dilutive to EPS for the three and six months ended June 30, 2020. These outstanding stock option awards could potentially dilute EPS 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 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Cost
|
As of December 31, 2020
|
111.3
|
|
|
$
|
5,727
|
|
Repurchases
|
—
|
|
|
—
|
|
As of June 30, 2021
|
111.3
|
|
|
$
|
5,727
|
|
Proceeds received from stock option exercises increase the repurchase capacity under the program. Cash proceeds received from stock option exercises during the six months ended June 30, 2021 were $4 million. As of June 30, 2021, the Company had $354 million of remaining availability under its program. In March 2020, the Company suspended its share repurchase activity due to the uncertainty resulting from COVID-19. On July 15, 2020, the Company amended the credit agreement for its revolving credit facility and term loan B. Among other changes, the amendment places the Company into a relief
period from July 15, 2020 through April 1, 2022 (“Relief Period”) that prohibits the use of cash for share repurchases until such time as the Company chooses to exercise its option to exit the Relief Period. The Company has the option to terminate the Relief Period at any time it can demonstrate compliance with the 4.25 to 1.0 first lien leverage ratio.
5. Acquisitions
Travel + Leisure. On January 5, 2021, the Company acquired the Travel + Leisure brand from Meredith Corporation for $100 million, of which the Company paid $35 million at closing and an additional $20 million during the second quarter of 2021. The remaining payments are to be completed by June 2024. This transaction was accounted for as an asset acquisition, with the full consideration allocated to the related trademark indefinite-lived intangible asset.
6. Discontinued Operations
During 2018, the Company completed the spin-off of its hotel business (“Spin-off”) Wyndham Hotels & Resorts, Inc. (“Wyndham Hotels”) 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. The Company recognized a Loss on disposal of discontinued business, net of income taxes of $2 million during the three and six months ended June 30, 2021.
7. Vacation Ownership Contract Receivables
The Company generates vacation ownership contract receivables (“VOCRs”) by extending financing to the purchasers of its VOIs. Vacation ownership contract receivables, net consisted of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2021
|
|
December 31,
2020
|
Vacation ownership contract receivables:
|
|
|
|
Securitized (a)
|
$
|
2,158
|
|
|
$
|
2,458
|
|
Non-securitized (b)
|
734
|
|
|
717
|
|
Vacation ownership contract receivables, gross
|
2,892
|
|
|
3,175
|
|
Less: Allowance for loan losses
|
573
|
|
|
693
|
|
Vacation ownership contract receivables, net
|
$
|
2,319
|
|
|
$
|
2,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)Excludes $17 million and $23 million of accrued interest on securitized VOCRs as of June 30, 2021 and December 31, 2020, which are included in Trade receivables, net on the Condensed Consolidated Balance Sheets.
(b)Excludes $6 million and $9 million of accrued interest on non-securitized VOCRs as of June 30, 2021 and December 31, 2020, which are included in Trade receivables, net on the Condensed Consolidated Balance Sheets.
During the three and six months ended June 30, 2021, the Company’s securitized VOCRs generated interest income of $77 million and $156 million. During the three and six months ended June 30, 2020, the Company’s securitized VOCRs generated interest income of $105 million and $211 million. Such interest income is included within Consumer financing revenue on the Condensed Consolidated Statements of Income/(Loss).
During the six months ended June 30, 2021 and 2020, the Company originated VOCRs of $299 million and $233 million, and received principal collections of $389 million and $387 million. The weighted average interest rate on outstanding VOCRs was 14.5% and 14.4% as of June 30, 2021 and December 31, 2020.
The activity in the allowance for loan losses on VOCRs was as follows (in millions):
|
|
|
|
|
|
|
Amount
|
Allowance for loan losses as of December 31, 2020
|
$
|
693
|
|
Provision for loan losses, net
|
71
|
|
Contract receivables write-offs, net
|
(191)
|
|
Allowance for loan losses as of June 30, 2021
|
$
|
573
|
|
|
|
|
|
|
|
|
Amount
|
Allowance for loan losses as of December 31, 2019
|
$
|
747
|
|
Provision for loan losses, net
|
345
|
|
Contract receivables write-offs, net
|
(246)
|
|
Allowance for loan losses as of June 30, 2020
|
$
|
846
|
|
Due to the economic downturn resulting from COVID-19 during the first quarter of 2020, the Company evaluated the potential impact of COVID-19 on its owners’ ability to repay their contract receivables and as a result of current and projected unemployment rates at that time, the Company recorded a COVID-19 related allowance for loan losses. This allowance consisted of a $225 million COVID-19 related provision, which was reflected as a reduction to Vacation ownership interest sales and $55 million of estimated recoveries, which were reflected as a reduction to Cost/(recovery) of vacation ownership interests on the Condensed Consolidated Statements of Income/(Loss). During the second quarter of 2021, the Company analyzed the adequacy of the COVID-19 related allowance consistent with past methodology, and due to the improvement in net new defaults the Company reduced this allowance resulting in a $26 million increase to Vacation ownership interest sales and a corresponding $10 million increase to Cost/(recovery) of vacation ownership interests on the Condensed Consolidated Statements of Income/(Loss).
Estimating the amount of the COVID-19 related allowance involves the use of significant estimates and assumptions. Management based its estimates upon historical data on the relationship between unemployment rates and net new defaults observed during the most recent recession in 2008. Specifically, historical data indicated that net new defaults did not return to prior levels until 15-20 months after the peak in unemployment. As of June 30, 2021, given the significant amount of government assistance provided to consumers during the pandemic, the Company estimated default rates would remain elevated for the next six to nine months as these programs expire. The Company will continue to monitor this reserve as more information becomes available.
The Company recorded net provisions for loan losses of $33 million and $71 million as a reduction of net revenues during the three and six months ended June 30, 2021, and $30 million and $345 million for the three and six months ended June 30, 2020, inclusive of the aforementioned COVID-19 related adjustments.
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 within the U.S. 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 Vacation Ownership 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 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2021
|
|
700+
|
|
600-699
|
|
<600
|
|
No Score
|
|
Asia Pacific
|
|
Total
|
Current
|
$
|
1,624
|
|
|
$
|
764
|
|
|
$
|
129
|
|
|
$
|
80
|
|
|
$
|
197
|
|
|
$
|
2,794
|
|
31 - 60 days
|
15
|
|
|
16
|
|
|
10
|
|
|
2
|
|
|
1
|
|
|
44
|
|
61 - 90 days
|
8
|
|
|
10
|
|
|
7
|
|
|
1
|
|
|
1
|
|
|
27
|
|
91 - 120 days
|
8
|
|
|
10
|
|
|
7
|
|
|
1
|
|
|
1
|
|
|
27
|
|
Total (a)
|
$
|
1,655
|
|
|
$
|
800
|
|
|
$
|
153
|
|
|
$
|
84
|
|
|
$
|
200
|
|
|
$
|
2,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
700+
|
|
600-699
|
|
<600
|
|
No Score
|
|
Asia Pacific
|
|
Total
|
Current
|
$
|
1,706
|
|
|
$
|
835
|
|
|
$
|
160
|
|
|
$
|
96
|
|
|
$
|
221
|
|
|
$
|
3,018
|
|
31 - 60 days
|
20
|
|
|
25
|
|
|
13
|
|
|
4
|
|
|
2
|
|
|
64
|
|
61 - 90 days
|
13
|
|
|
18
|
|
|
12
|
|
|
3
|
|
|
1
|
|
|
47
|
|
91 - 120 days
|
12
|
|
|
16
|
|
|
14
|
|
|
3
|
|
|
1
|
|
|
46
|
|
Total (a)
|
$
|
1,751
|
|
|
$
|
894
|
|
|
$
|
199
|
|
|
$
|
106
|
|
|
$
|
225
|
|
|
$
|
3,175
|
|
(a)Includes contracts under temporary deferment (up to 180 days). As of June 30, 2021 and December 31, 2020, contracts under deferment total $12 million and $37 million.
The Company ceases to accrue interest on VOI contract receivables once the contract has remained delinquent for greater than 90 days and reverses all of the associated accrued interest recognized to date against interest income included within Consumer financing revenue on the Condensed Consolidated Statements of Income/(Loss). 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.
The following table details the year of origination of financing receivables using the most recently updated FICO scores, based on the policy described above (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2021
|
|
700+
|
|
600-699
|
|
<600
|
|
No Score
|
|
Asia Pacific
|
|
Total
|
2021
|
$
|
262
|
|
|
$
|
86
|
|
|
$
|
1
|
|
|
$
|
6
|
|
|
$
|
29
|
|
|
$
|
384
|
|
2020
|
295
|
|
|
147
|
|
|
22
|
|
|
7
|
|
|
49
|
|
|
520
|
|
2019
|
386
|
|
|
204
|
|
|
49
|
|
|
22
|
|
|
43
|
|
|
704
|
|
2018
|
285
|
|
|
147
|
|
|
34
|
|
|
16
|
|
|
30
|
|
|
512
|
|
2017
|
188
|
|
|
92
|
|
|
21
|
|
|
13
|
|
|
18
|
|
|
332
|
|
Prior
|
239
|
|
|
124
|
|
|
26
|
|
|
20
|
|
|
31
|
|
|
440
|
|
Total
|
$
|
1,655
|
|
|
$
|
800
|
|
|
$
|
153
|
|
|
$
|
84
|
|
|
$
|
200
|
|
|
$
|
2,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
700+
|
|
600-699
|
|
<600
|
|
No Score
|
|
Asia Pacific
|
|
Total
|
2020
|
$
|
424
|
|
|
$
|
173
|
|
|
$
|
11
|
|
|
$
|
17
|
|
|
$
|
55
|
|
|
$
|
680
|
|
2019
|
476
|
|
|
269
|
|
|
67
|
|
|
27
|
|
|
70
|
|
|
909
|
|
2018
|
339
|
|
|
183
|
|
|
50
|
|
|
21
|
|
|
36
|
|
|
629
|
|
2017
|
220
|
|
|
115
|
|
|
31
|
|
|
16
|
|
|
22
|
|
|
404
|
|
2016
|
128
|
|
|
63
|
|
|
16
|
|
|
10
|
|
|
16
|
|
|
233
|
|
Prior
|
164
|
|
|
91
|
|
|
24
|
|
|
15
|
|
|
26
|
|
|
320
|
|
Total
|
$
|
1,751
|
|
|
$
|
894
|
|
|
$
|
199
|
|
|
$
|
106
|
|
|
$
|
225
|
|
|
$
|
3,175
|
|
8. Inventory
Inventory consisted of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2021
|
|
December 31,
2020
|
Completed VOI inventory
|
$
|
1,085
|
|
|
$
|
1,049
|
|
Estimated VOI recoveries, net
|
206
|
|
|
246
|
|
VOI construction in process
|
31
|
|
|
30
|
|
Inventory sold subject to repurchase
|
13
|
|
|
13
|
|
Vacation exchange credits and other
|
3
|
|
|
8
|
|
Land held for VOI development
|
1
|
|
|
1
|
|
Total inventory
|
$
|
1,339
|
|
|
$
|
1,347
|
|
The Company had net transfers of VOI inventory to property and equipment of $11 million and $13 million during the six months ended June 30, 2021 and 2020.
During 2020, as a result of resort closures and cancellations surrounding COVID-19, the Company recorded $48 million of reductions to exchange inventory consisting of costs previously incurred by RCI to provide enhanced out-of-network travel
options to members. These write-offs were included within Operating expenses on the Condensed Consolidated Statements of Income/(Loss), $38 million of which is included in the results for the six months ended June 30, 2020. The Company anticipates that remaining inventory will be fully utilized to maximize exchange supply for its members in 2021 and beyond.
Inventory Sale Transactions
During 2020, the Company acquired properties in Orlando, Florida, and Moab, Utah, from third-party developers for vacation ownership inventory and property and equipment.
During 2013, the Company sold real property located in Las Vegas, Nevada, to a third-party developer, consisting of vacation ownership inventory and property and equipment. The Company recognized no gain or loss on this sale transaction.
In accordance with the agreements with the third-party developers, the Company has conditional rights and conditional obligations to repurchase the completed properties from the developers subject to the properties conforming to the Company's vacation ownership resort standards and provided that the third-party developers have not sold the properties to another party. Under the sale of real estate accounting guidance, the conditional rights and obligations of the Company constitute continuing involvement and thus the Company was unable to account for these transactions as a sale.
The following table summarizes the activity related to the Company’s inventory obligations (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Las Vegas (a)
|
|
Moab (a)
|
|
Orlando (a)
|
|
Other (b)
|
|
Total
|
December 31, 2020
|
|
|
|
|
$
|
13
|
|
|
$
|
31
|
|
|
$
|
22
|
|
|
$
|
17
|
|
|
$
|
83
|
|
Purchases
|
|
|
|
|
2
|
|
|
25
|
|
|
1
|
|
|
39
|
|
|
67
|
|
Payments
|
|
|
|
|
(2)
|
|
|
(56)
|
|
|
(5)
|
|
|
(46)
|
|
|
(109)
|
|
June 30, 2021
|
|
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
18
|
|
|
$
|
10
|
|
|
$
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
$
|
43
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
49
|
|
Purchases
|
|
|
|
|
15
|
|
|
—
|
|
|
—
|
|
|
70
|
|
|
85
|
|
Payments
|
|
|
|
|
(19)
|
|
|
—
|
|
|
—
|
|
|
(65)
|
|
|
(84)
|
|
June 30, 2020
|
|
|
|
|
$
|
39
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11
|
|
|
$
|
50
|
|
(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 this commitment was $65 million as of June 30, 2021.
9. Property and Equipment
Property and equipment, net, consisted of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2021
|
|
December 31, 2020
|
Land
|
$
|
31
|
|
|
$
|
30
|
|
Building and leasehold improvements
|
596
|
|
|
591
|
|
Furniture, fixtures and equipment
|
208
|
|
|
207
|
|
Capitalized software
|
707
|
|
|
694
|
|
Finance leases
|
15
|
|
|
14
|
|
Construction in progress
|
19
|
|
|
12
|
|
Total property and equipment
|
1,576
|
|
|
1,548
|
|
Less: Accumulated depreciation and amortization
|
931
|
|
|
882
|
|
Property and equipment, net
|
$
|
645
|
|
|
$
|
666
|
|
10. Debt
The Company’s indebtedness consisted of (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2021
|
|
December 31,
2020
|
Non-recourse vacation ownership debt: (a)
|
|
|
|
Term notes (b)
|
$
|
1,719
|
|
|
$
|
1,893
|
|
USD bank conduit facility (due October 2022) (c)
|
154
|
|
|
168
|
|
AUD/NZD bank conduit facility (due April 2023) (d)
|
145
|
|
|
173
|
|
Total
|
$
|
2,018
|
|
|
$
|
2,234
|
|
|
|
|
|
Debt: (e)
|
|
|
|
$1.0 billion secured revolving credit facility (due May 2023) (f)
|
$
|
—
|
|
|
$
|
547
|
|
$300 million secured term loan B (due May 2025) (g)
|
290
|
|
|
291
|
|
$250 million 5.625% secured notes (due March 2021)
|
—
|
|
|
250
|
|
$650 million 4.25% secured notes (due March 2022) (h)
|
650
|
|
|
650
|
|
$400 million 3.90% secured notes (due March 2023) (i)
|
402
|
|
|
402
|
|
$300 million 5.65% secured notes (due April 2024)
|
299
|
|
|
299
|
|
$350 million 6.60% secured notes (due October 2025) (j)
|
344
|
|
|
344
|
|
$650 million 6.625% secured notes (due July 2026)
|
642
|
|
|
641
|
|
$400 million 6.00% secured notes (due April 2027) (k)
|
407
|
|
|
408
|
|
$350 million 4.625% secured notes (due March 2030)
|
345
|
|
|
345
|
|
Finance leases
|
6
|
|
|
7
|
|
|
|
|
|
Total
|
$
|
3,385
|
|
|
$
|
4,184
|
|
(a)Represents non-recourse debt that is securitized through bankruptcy-remote special purpose entities (“SPEs”), the creditors of which have no recourse to the Company for principal and interest. These outstanding borrowings (which legally are not liabilities of the Company) are collateralized by $2.26 billion and $2.57 billion of underlying gross VOCRs and related assets (which legally are not assets of the Company) as of June 30, 2021 and December 31, 2020.
(b)The carrying amounts of the term notes are net of deferred financing costs of $19 million and $21 million as of June 30, 2021 and December 31, 2020.
(c)The Company has a borrowing capacity of $800 million under the USD bank conduit facility through October 2022. Borrowings under this facility are required to be repaid as the collateralized receivables amortize but no later than November 2023.
(d)The Company has a borrowing capacity of 250 million Australian dollars (“AUD”) and 48 million New Zealand dollars (“NZD”) under the AUD/NZD bank conduit facility through April 2023. Borrowings under this facility are required to be repaid no later than April 2025.
(e)The carrying amounts of the secured notes and term loan are net of unamortized discounts of $14 million and $16 million as of June 30, 2021 and December 31, 2020, and net of unamortized debt financing costs of $7 million as of June 30, 2021 and December 31, 2020.
(f)The weighted average effective interest rate on borrowings from this facility were 3.19% and 3.02% as of June 30, 2021 and December 31, 2020. In late March 2020, the Company drew down its $1.0 billion secured revolving credit facility as a precautionary measure due to COVID-19. As of June 30, 2021, these borrowings have been repaid.
(g)The weighted average effective interest rate on borrowings from this facility was 2.39% and 2.93% as of June 30, 2021 and December 31, 2020.
(h)Includes less than $1 million of unamortized gains from the settlement of a derivative as of June 30, 2021 and December 31, 2020.
(i)Includes $2 million and $3 million of unamortized gains from the settlement of a derivative as of June 30, 2021 and December 31, 2020.
(j)Includes $4 million and $5 million of unamortized losses from the settlement of a derivative as of June 30, 2021 and December 31, 2020.
(k)Includes $10 million and $11 million of unamortized gains from the settlement of a derivative as of June 30, 2021 and December 31, 2020.
Sierra Timeshare 2021-1 Receivables Funding LLC
On March 8, 2021, the Company closed on a placement of a series of term notes payable, issued by Sierra Timeshare 2021-1 Receivables Fundings LLC, with an initial principal amount of $500 million, secured by VOCRs and bearing interest at a weighted average coupon rate of 1.57%. The advance rate for this transaction was 98%.
AUD/NZD Bank Conduit Renewal
On April 27, 2021, the Company renewed its AUD/NZD timeshare receivables conduit facility, extending the end of the commitment period from September 2021 to April 2023. The renewal includes a reduction of the AUD borrowing capacity from A$255 million to A$250 million, while the NZD capacity remains unchanged at NZ$48 million. The renewal bears interest at variable rates based on the Bank Bill Swap Bid Rate plus 1.65%.
Maturities and Capacity
The Company’s outstanding debt as of June 30, 2021, matures as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-recourse Vacation Ownership Debt
|
|
Debt
|
|
Total
|
Within 1 year
|
$
|
274
|
|
|
$
|
655
|
|
|
$
|
929
|
|
Between 1 and 2 years
|
372
|
|
|
407
|
|
|
779
|
|
Between 2 and 3 years
|
207
|
|
|
303
|
|
|
510
|
|
Between 3 and 4 years
|
207
|
|
|
281
|
|
|
488
|
|
Between 4 and 5 years
|
227
|
|
|
344
|
|
|
571
|
|
Thereafter
|
731
|
|
|
1,395
|
|
|
2,126
|
|
|
$
|
2,018
|
|
|
$
|
3,385
|
|
|
$
|
5,403
|
|
Required principal payments on the non-recourse vacation ownership debt are based on the contractual repayment terms of the underlying VOCRs. Actual maturities may differ as a result of prepayments by the VOCR obligors.
As of June 30, 2021, available capacity under the Company’s borrowing arrangements was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-recourse Conduit Facilities (a)
|
|
Revolving
Credit Facilities (b)
|
Total capacity
|
$
|
1,025
|
|
|
$
|
1,000
|
|
Less: Outstanding borrowings
|
299
|
|
|
—
|
|
Less: Letters of credit
|
—
|
|
|
66
|
|
Available capacity
|
$
|
726
|
|
|
$
|
934
|
|
(a)Consists of the Company’s USD bank conduit facility and AUD/NZD bank conduit facility. The capacity of these facilities 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 secured 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. 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.
On July 15, 2020, the Company entered into an amendment to the Company’s credit agreement governing its revolving credit facility and term loan B (“Credit Agreement Amendment”). The Credit Agreement Amendment establishes a Relief Period with respect to the Company’s secured revolving credit facility, which commenced on July 15, 2020 and will end on
April 1, 2022, or upon earlier termination by the Company of the Relief Period, subject to certain conditions. The Credit Agreement Amendment increased the existing leverage-based financial covenant of 4.25 to 1.0 by varying levels for each applicable quarter during the Relief Period. The maximum first lien leverage ratio for the test period ending June 30, 2021 was 7.5 to 1.0. The maximum first lien leverage ratio will decrease 0.75 each quarter beginning in the third quarter of 2021 through the end of the Relief Period.
Beginning in the first quarter of 2021, and extending through the third quarter of 2021, the Credit Agreement Amendment provides that consolidated EBITDA (as defined in the credit agreement), for the purposes of the first lien leverage ratio, will be measured based on the greater of either a trailing 12-months preceding the measurement date basis or an annualized basis. Thereafter, consolidated EBITDA will be measured on a trailing 12-months basis, and following the Relief Period, the Credit Agreement Amendment reestablishes the leverage-based financial covenant of 4.25 to 1.0 which was in existence prior to the effective date of the Credit Agreement Amendment. In addition, the Credit Agreement Amendment, among other things, increased the interest rate applicable to borrowings under the Company’s secured revolving credit facility utilizing a tiered pricing grid based on the Company’s first lien leverage ratio in any quarter it exceeds 4.25 to 1.0, until the end of the Relief Period; adds a new minimum liquidity covenant, tested quarterly until the end of the Relief Period, of (i) $250 million plus (ii) 50% of the aggregate amount of dividends paid after the effective date of the Credit Agreement Amendment and on or prior to the last day of the relevant fiscal quarter; and requires the Company to maintain an interest coverage ratio (as defined in the credit agreement) of not less than 2.0 to 1.0, which shall increase to 2.5 to 1.0 after the Relief Period, the level existing prior to the effective date of the Credit Agreement Amendment. Finally, the Credit Agreement Amendment amends the definition of “Material Adverse Effect” in the credit agreement to take into consideration the impacts of the COVID-19 pandemic during the Relief Period. The Relief Period includes certain restrictions on the use of cash including the prohibition of share repurchases until such time as the Company is able to and chooses to exercise its option to exit the amendment. Additionally, the amendment limits the payout of dividends during the Relief Period to not exceed $0.50 per share, the rate in effect prior to the amendment. The Company has the option to terminate the Relief Period at any time it can demonstrate compliance with the 4.25 to 1.0 first lien leverage ratio, subject to certain conditions.
As of June 30, 2021, the Company’s interest coverage ratio was 3.1 to 1.0 and the first lien leverage ratio was 4.7 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, 2021, the Company was in compliance with the financial covenants described above. Under the Credit Agreement Amendment, when the first lien leverage ratio exceeds 4.25 to 1.0, the interest rate on revolver borrowings increases, and the Company is subject to higher fees associated with its letters of credit based on a tiered pricing grid. Given the first lien leverage ratio of 5.4 to 1.0 at December 31, 2020, the Company is now subject to higher fees associated with letters of credit and the interest rate on the revolver borrowings increased 25 basis points effective March 2, 2021. This interest rate and fees associated with letters of credit are subject to future changes based on the Company’s first lien leverage ratio which could serve to further increase the rate up to an additional 25 basis points if this ratio were to exceed 5.75 to 1.0, or reduce this rate if this ratio were to decrease to 4.25 to 1.0 or below.
Each of the Company’s non-recourse, securitized term notes, and the bank conduit facilities contain various triggers relating to the performance of the applicable loan pools. If the VOCRs pool that collateralizes one of the Company’s 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, 2021, all of the Company’s securitized loan pools were in compliance with applicable contractual triggers.
Interest Expense
The Company incurred interest expense of $47 million and $100 million during the three and six months ended June 30, 2021. Such amounts consisted primarily of interest on debt, excluding non-recourse vacation ownership debt, and included an offset of less than $1 million of capitalized interest during both the three and six months ended June 30, 2021. Cash paid related to such interest was $105 million during the six months ended June 30, 2021.
The Company incurred interest expense of $46 million and $87 million during the three and six months ended June 30, 2020. Such amounts consisted primarily of interest on debt, excluding non-recourse vacation ownership debt, and included an offset of less than $1 million and $1 million of capitalized interest during the three and six months ended June 30, 2020. Cash paid related to such interest was $81 million during the six months ended June 30, 2020.
Interest expense incurred in connection with the Company’s non-recourse vacation ownership debt was $20 million and $44 million during the three and six months ended June 30, 2021, and $25 million and $50 million during the three and six months ended June 30, 2020, and is recorded within Consumer financing interest on the Condensed Consolidated Statements of Income/(Loss). Cash paid related to such interest was $31 million and $37 million for the six months ended June 30, 2021 and 2020.
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, 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 VOCRs and sells them to bankruptcy-remote entities. VOCRs qualify for securitization based primarily on the credit strength of the VOI purchaser to whom financing has been extended. VOCRs are securitized through bankruptcy-remote SPEs that are consolidated within the Company’s Condensed Consolidated Financial Statements. As a result, the Company does not recognize gains or losses resulting from these securitizations at the time of sale to the SPEs. Interest income is recognized when earned over the contractual life of the VOCRs. The Company services the securitized VOCRs 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 VOCRs 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 of these SPEs have no recourse to the Company for principal and interest.
The assets and liabilities of these vacation ownership SPEs are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2021
|
|
December 31,
2020
|
Securitized contract receivables, gross (a)
|
$
|
2,158
|
|
|
$
|
2,458
|
|
Securitized restricted cash (b)
|
83
|
|
|
92
|
|
Interest receivables on securitized contract receivables (c)
|
17
|
|
|
23
|
|
Other assets (d)
|
5
|
|
|
5
|
|
Total SPE assets
|
2,263
|
|
|
2,578
|
|
Non-recourse term notes (e) (f)
|
1,719
|
|
|
1,893
|
|
Non-recourse conduit facilities (e)
|
299
|
|
|
341
|
|
Other liabilities (g)
|
9
|
|
|
2
|
|
Total SPE liabilities
|
2,027
|
|
|
2,236
|
|
SPE assets in excess of SPE liabilities
|
$
|
236
|
|
|
$
|
342
|
|
(a)The Company does not allocate allowance for loan losses to SPEs. This amount is 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 $19 million and $21 million as of June 30, 2021 and December 31, 2020, 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 VOCRs that have not been securitized through bankruptcy-remote SPEs. Such gross receivables were $734 million and $717 million as of June 30, 2021 and December 31, 2020. A summary of total vacation ownership receivables and other securitized assets, net of securitized liabilities and the allowance for loan losses, is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2021
|
|
December 31,
2020
|
SPE assets in excess of SPE liabilities
|
$
|
236
|
|
|
$
|
342
|
|
Non-securitized contract receivables
|
734
|
|
|
717
|
|
Less: Allowance for loan losses
|
573
|
|
|
693
|
|
Total, net
|
$
|
397
|
|
|
$
|
366
|
|
12. Fair Value
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 currently consist of foreign exchange forward contracts and interest rate caps.
As of June 30, 2021, the Company had foreign exchange contracts which resulted in less than $1 million of assets which are included within Other assets and $1 million of liabilities which are included within Accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets. On a recurring basis, such assets and liabilities are remeasured at estimated fair value (all of which are Level 2) and thus are equal to the carrying value.
The impact of interest rate caps was immaterial as of June 30, 2021 and 2020.
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 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
December 31, 2020
|
|
Carrying
Amount
|
|
Estimated Fair Value
|
|
Carrying
Amount
|
|
Estimated Fair Value
|
Assets
|
|
|
|
|
|
|
|
Vacation ownership contract receivables, net (Level 3)
|
$
|
2,319
|
|
|
$
|
2,811
|
|
|
$
|
2,482
|
|
|
$
|
3,035
|
|
Liabilities
|
|
|
|
|
|
|
|
Debt (Level 2)
|
$
|
5,403
|
|
|
$
|
5,691
|
|
|
$
|
6,418
|
|
|
$
|
6,705
|
|
The Company estimates the fair value of its VOCRs 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 euro, British pound, Australian and Canadian 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 periodically uses financial derivatives to strategically adjust its mix of fixed to floating rate debt. The derivative instruments utilized include interest rate swaps which convert fixed–rate debt into variable–rate debt (i.e. fair value hedges) and interest rate caps (undesignated hedges) to manage the overall interest cost. For relationships designated as fair value hedges, changes in fair value of the derivatives are recorded in income, with offsetting adjustments to the carrying amount of the hedged debt. As of June 30, 2021 and 2020, the Company had no fair value interest rate hedges.
Losses on derivatives recognized in AOCL for the three and six months ended June 30, 2021 and 2020, were not material.
14. Income Taxes
The Company files U.S. federal, state and foreign income tax returns in jurisdictions with varying statutes of limitations. The Company is no longer subject to U.S. federal income tax examinations for years prior to 2016. In addition, with few exceptions, the Company is no longer subject to state, local or foreign income tax examinations for years prior to 2011.
The Company’s effective tax rate was 29.5% and (7.2)% for the three months ended June 30, 2021 and 2020; and 26.6% and 10.0% for the six months ended June 30, 2021 and 2020. The effective tax rate was significantly impacted during the three and six months ended June 30, 2020, due to COVID-19, which led to a mix of earnings in higher tax rate jurisdictions and losses in lower tax rate jurisdictions that significantly reduced our overall effective tax rate in 2020. In addition, the effective tax rate for the three months ended June 30, 2021, increased due to additions to certain unrecognized tax benefits and remeasurement of net deferred tax liabilities as a result of changes in certain state and foreign tax rates.
The Company made income tax payments, net of tax refunds, of $65 million and $5 million during the six months ended June 30, 2021 and 2020.
Tax positions are reviewed at least quarterly and adjusted as new information becomes available. The recoverability of deferred tax assets is evaluated by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, available tax planning strategies and forecasted operating earnings. These estimates of future taxable income inherently require significant judgment. To the extent it is considered more likely than not that a deferred tax asset will be not recovered, a valuation allowance is established. Due to various factors including negative impacts of COVID-19, the Company had net increases in its valuation allowances related to foreign tax credits and other deferred assets of $1 million and $2 million during the six months ended June 30, 2021 and 2020.
On March 11, 2021, the American Rescue Plan Act of 2021 (“ARPA”) was signed into law, which is the latest stimulus package to provide COVID-19 relief. ARPA includes an extension of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act Employee Retention Tax Credit until December 31, 2021. The Company recorded $1 million of additional employee retention tax credits during the six months ended June 30, 2021. In addition to the expansion of the employee retention credit (among other provisions), ARPA includes several revenue-raising and business tax provisions. One such provision that will impact the Company is the expansion of the limitation of compensation deductions above $1 million for certain covered employees of publicly held corporations. Effective for taxable years after December 31, 2026, ARPA expands the limitation to cover the next five highest compensated employees.
On March 27, 2020, the CARES Act was established to provide emergency assistance and health care for individuals, families, and businesses affected by COVID-19 and generally support the U.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, and technical corrections to tax depreciation methods for qualified improvement property. The Company recorded $21 million of employee retention tax credits for the three months ended June 30, 2020, including credits from similar programs outside the U.S. The Company has deferred certain social security payments and had additional depreciation deductions relating to qualified improvement property.
While the Company continues to review and consider any available benefits under the CARES Act, ARPA, or similar legislation that may be enacted in response to COVID-19 for which it qualifies, the Company cannot predict the manner in which such benefits will be allocated or administered and cannot assure that it will be able to receive such benefits in a timely manner.
15. Leases
The Company leases property and equipment under finance and operating leases for its corporate headquarters, administrative functions, marketing and sales offices, and various other facilities and equipment. For leases with terms greater than 12 months, the Company records the related asset and obligation at the present value of lease payments over the term. Many of its leases include rental escalation clauses, lease incentives, renewal options and/or termination options that are factored into the Company’s 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 Condensed Consolidated Statements of Income/(Loss).
When available, the Company uses the rate implicit in the lease to discount lease payments to present value; however, most of its leases do not provide a readily determinable implicit rate. Therefore, the Company must estimate its incremental borrowing rate to discount the lease payments based on information available at lease commencement. The majority of the Company’s leases have remaining lease terms of one to 20 years, some of which include options to extend the leases for up to 10 years, and some of which include options to terminate the leases within one year.
The table below presents certain information related to the lease costs for finance and operating leases (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Operating lease cost
|
$
|
6
|
|
|
$
|
9
|
|
|
$
|
11
|
|
|
$
|
17
|
|
|
|
|
|
|
|
|
|
Short-term lease cost
|
$
|
3
|
|
|
$
|
2
|
|
|
$
|
6
|
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
Finance lease cost:
|
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
1
|
|
Interest on lease liabilities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total finance lease cost
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
1
|
|
The table below presents the lease-related assets and liabilities recorded on the Condensed Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Classification
|
|
June 30, 2021
|
|
December 31, 2020
|
Operating leases (in millions):
|
|
|
|
|
|
Operating lease right-of-use assets
|
Other assets
|
|
$
|
86
|
|
|
$
|
92
|
|
Operating lease liabilities
|
Accrued expenses and other liabilities
|
|
$
|
147
|
|
|
$
|
157
|
|
|
|
|
|
|
|
Finance leases (in millions):
|
|
|
|
|
|
Finance lease assets (a)
|
Property and equipment, net
|
|
$
|
7
|
|
|
$
|
8
|
|
Finance lease liabilities
|
Debt
|
|
$
|
6
|
|
|
$
|
7
|
|
|
|
|
|
|
|
Weighted average remaining lease term:
|
|
|
|
|
|
Operating leases
|
|
|
6.7 years
|
|
7.1 years
|
Finance leases
|
|
|
2.5 years
|
|
2.6 years
|
Weighted average discount rate:
|
|
|
|
|
|
Operating leases (b)
|
|
|
5.8
|
%
|
|
5.9
|
%
|
Finance leases
|
|
|
5.0
|
%
|
|
5.6
|
%
|
(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 supplemental cash flow information related to leases (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
June 30,
|
|
2021
|
|
2020
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
Operating cash flows from operating leases
|
$
|
19
|
|
|
$
|
19
|
|
Operating cash flows from finance leases
|
—
|
|
|
—
|
|
Financing cash flows from finance leases
|
2
|
|
|
1
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
Operating leases
|
$
|
5
|
|
|
$
|
8
|
|
Finance leases
|
1
|
|
|
5
|
|
The table below presents maturities of lease liabilities as of June 30, 2021 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance
Leases
|
Six months ending December 31, 2021
|
$
|
17
|
|
|
$
|
1
|
|
2022
|
31
|
|
|
3
|
|
2023
|
30
|
|
|
2
|
|
2024
|
28
|
|
|
1
|
|
2025
|
24
|
|
|
—
|
|
Thereafter
|
49
|
|
|
—
|
|
Total minimum lease payments
|
179
|
|
|
7
|
|
Less: Amount of lease payments representing interest
|
(32)
|
|
|
(1)
|
|
Present value of future minimum lease payments
|
$
|
147
|
|
|
$
|
6
|
|
Due to the impact of COVID-19 during the second quarter of 2020, the Company decided to abandon the remaining portion of its administrative offices in New Jersey. The Company was also notified that Wyndham Hotels exercised its early termination rights under the sublease agreement for this building. As a result, the Company recorded $22 million of restructuring charges associated with non-lease components of the office space and $24 million of impairment charges associated with the write-off of right-of-use assets and furniture, fixtures and equipment for both the three and six months ended June 30, 2020.
16. Commitments and Contingencies
The Company is involved in claims, legal and regulatory proceedings, and governmental inquiries related to its business, none of which, in the opinion of management, is expected to have a material effect on the Company’s results of operations or financial condition.
Travel + Leisure 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 Travel and Membership 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, 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 fiscal quarter and makes revisions based on changes in facts and circumstances including changes to its strategy in dealing with these matters. The Company believes that it has adequately accrued for such matters with reserves of $16 million and $13 million as of June 30, 2021 and December 31, 2020. 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, 2021, the potential exposure resulting from adverse outcomes of such legal proceedings could, in the aggregate, range up to $36 million in excess of recorded accruals. Such reserves and potential exposure are exclusive of matters relating to the Company’s separation from Cendant, matters relating to the
Spin-off, matters relating to the sale of the European vacation rentals business, and matters relating to the sale of the North American vacation rentals business, which are discussed in Note 23—Transactions with Former Parent and Former Subsidiaries. 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.
For matters deemed reasonably possible, therefore 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. As of June 30, 2021, the potential exposure resulting from adverse outcomes of such legal proceedings could, in the aggregate, range up to an amount of $1 million.
GUARANTEES/INDEMNIFICATIONS
Standard Guarantees/Indemnifications
In the ordinary course of business, the Company enters into agreements that contain standard guarantees and indemnities whereby the Company indemnifies another party for specified breaches of, or third-party claims relating to, an underlying agreement. Such underlying agreements are typically entered into by one of the Company’s subsidiaries. The various underlying agreements generally govern purchases, sales or outsourcing of products or services, leases of real estate, licensing of software and/or development of vacation ownership properties, access to credit facilities, derivatives and issuances of debt securities. Also in the ordinary course of business, the Company provides corporate guarantees for its operating business units relating to merchant credit-card processing for prepaid customer stays and other deposits. While a majority of these guarantees and indemnifications extend only for the duration of the underlying agreement, some survive the expiration of the agreement. The Company is not able to estimate the maximum potential amount of future payments to be made under these guarantees and indemnifications as the triggering events are not predictable. In certain cases, the Company maintains insurance coverage that may mitigate any potential payments.
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 23—Transactions with Former Parent and Former Subsidiaries.
17. Accumulated Other Comprehensive (Loss)/Income
The components of accumulated other comprehensive loss are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
Unrealized
|
|
Defined
|
|
Accumulated
|
|
Currency
|
|
(Losses)/Gains
|
|
Benefit
|
|
Other
|
|
Translation
|
|
on Cash Flow
|
|
Pension
|
|
Comprehensive
|
Pretax
|
Adjustments
|
|
Hedges
|
|
Plans
|
|
(Loss)/Income
|
Balance, December 31, 2020
|
$
|
(113)
|
|
|
$
|
(1)
|
|
|
$
|
—
|
|
|
$
|
(114)
|
|
Other comprehensive loss
|
(11)
|
|
|
—
|
|
|
—
|
|
|
(11)
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2021
|
$
|
(124)
|
|
|
$
|
(1)
|
|
|
$
|
—
|
|
|
$
|
(125)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
|
|
|
|
|
|
|
|
Balance, December 31, 2020
|
$
|
97
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
98
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2021
|
$
|
97
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of Tax
|
|
|
|
|
|
|
|
Balance, December 31, 2020
|
$
|
(16)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(16)
|
|
Other comprehensive loss
|
(11)
|
|
|
—
|
|
|
—
|
|
|
(11)
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2021
|
$
|
(27)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(27)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
Unrealized
|
|
Defined
|
|
Accumulated
|
|
Currency
|
|
(Losses)/Gains
|
|
Benefit
|
|
Other
|
|
Translation
|
|
on Cash Flow
|
|
Pension
|
|
Comprehensive
|
Pretax
|
Adjustments
|
|
Hedges
|
|
Plans
|
|
(Loss)/Income
|
Balance, December 31, 2019
|
$
|
(148)
|
|
|
$
|
(1)
|
|
|
$
|
1
|
|
|
$
|
(148)
|
|
Other comprehensive loss
|
(25)
|
|
|
—
|
|
|
—
|
|
|
(25)
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2020
|
$
|
(173)
|
|
|
$
|
(1)
|
|
|
$
|
1
|
|
|
$
|
(173)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
|
|
|
|
|
|
|
|
Balance, December 31, 2019
|
$
|
95
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
96
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2020
|
$
|
95
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of Tax
|
|
|
|
|
|
|
|
Balance, December 31, 2019
|
$
|
(53)
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
(52)
|
|
Other comprehensive loss
|
(25)
|
|
|
—
|
|
|
—
|
|
|
(25)
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2020
|
$
|
(78)
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
(77)
|
|
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.
18. Stock-Based Compensation
The Company has a stock-based compensation plan available to grant RSUs, PSUs, Stock-settled appreciation rights (“SSARs”), 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, 2021, 11.3 million shares remain available.
Incentive Equity Awards Granted by the Company
During the six months ended June 30, 2021, the Company granted incentive equity awards to key employees and senior officers totaling $33 million in the form of RSUs, $7 million in the form of PSUs, and $2 million in the form of stock options. Of these awards, the NQs and RSUs will vest ratably over a period of four years. The PSUs will cliff vest on the third anniversary of the grant date, contingent upon the Company achieving certain performance metrics.
During the six months ended June 30, 2020, the Company granted incentive equity awards to key employees and senior officers totaling $35 million in the form of RSUs, $8 million in the form of PSUs, and $8 million in the form of stock options.
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, 2021, consisted of the following (in millions, except grant prices):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2020
|
|
Granted
|
|
Vested/Exercised
|
|
Forfeitures(a)
|
|
Balance, June 30, 2021
|
|
RSUs
|
|
|
|
|
|
|
|
|
|
|
|
Number of RSUs
|
|
1.6
|
|
|
0.5
|
|
|
(0.4)
|
|
|
—
|
|
|
1.7
|
|
(b)
|
Weighted average grant price
|
|
$
|
38.22
|
|
|
$
|
59.03
|
|
|
$
|
44.73
|
|
|
$
|
—
|
|
|
$
|
47.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PSUs
|
|
|
|
|
|
|
|
|
|
|
|
Number of PSUs
|
|
0.3
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
0.4
|
|
(c)
|
Weighted average grant price
|
|
$
|
42.57
|
|
|
$
|
59.00
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
48.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SSARs
|
|
|
|
|
|
|
|
|
|
|
|
Number of SSARs
|
|
0.2
|
|
|
—
|
|
|
(0.2)
|
|
|
—
|
|
|
—
|
|
(d)
|
Weighted average grant price
|
|
$
|
34.51
|
|
|
$
|
—
|
|
|
$
|
34.51
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NQs (f)
|
|
|
|
|
|
|
|
|
|
|
|
Number of NQs
|
|
2.3
|
|
|
0.1
|
|
|
(0.1)
|
|
|
—
|
|
|
2.3
|
|
(e)
|
Weighted average grant price
|
|
$
|
44.15
|
|
|
$
|
59.00
|
|
|
$
|
44.50
|
|
|
$
|
—
|
|
|
$
|
45.32
|
|
|
(a)The Company recognizes forfeitures as they occur.
(b)Aggregate unrecognized compensation expense related to RSUs was $64 million as of June 30, 2021, which is expected to be recognized over a weighted average period of 2.8 years.
(c)There was no unrecognized compensation expense related to PSUs as these awards were not probable of vesting as of June 30, 2021. The maximum amount of compensation expense associated with these awards would be $8 million which would be recognized over a weighted average period of 2.5 years.
(d)As of June 30, 2021, all SSARs had been exercised and thus there was no unrecognized compensation expense.
(e)There were 0.9 million NQs which were exercisable as of June 30, 2021. These exercisable NQs will expire over a weighted average period of 7.4 years and carry a weighted average grant date fair value of $8.39. Unrecognized compensation expense for NQs was $10 million as of June 30, 2021, which is expected to be recognized over a weighted average period of 2.6 years.
(f)Upon exercise of NQs, the Company issues new shares to participants.
The fair values of stock options granted by the Company during 2021 were estimated on the date of 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
|
2021
|
|
2020
|
Grant date fair value
|
$18.87
|
|
$7.27
|
-
|
$7.28
|
Grant date strike price
|
$59.00
|
|
$41.04
|
Expected volatility
|
44.80%
|
|
32.60%
|
-
|
32.88%
|
Expected life
|
6.25 years
|
|
6.25
|
-
|
7.50 years
|
Risk-free interest rate
|
1.09%
|
|
0.95%
|
-
|
1.03%
|
Projected dividend yield
|
3.12%
|
|
4.87%
|
Stock-Based Compensation Expense
The Company recorded stock-based compensation expense of $9 million and $16 million during the three and six months ended June 30, 2021, and $7 million and $8 million during the three and six months ended June 30, 2020, related to incentive equity awards granted to key employees, senior officers, and non-employee directors.
The Company paid $9 million and $2 million of taxes for the net share settlement of incentive equity awards that vested during the six months ended June 30, 2021 and 2020.
Employee Stock Purchase Plan
The Company has an employee stock purchase plan which allows eligible employees to purchase common shares of Company stock through payroll deductions at a 10% 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 grants under this plan during the six months ended June 30, 2021 and 2020.
19. Segment Information
The Company has two reportable segments: Vacation Ownership (formerly Wyndham Vacation Clubs) and Travel and Membership (formerly Panorama or Vacation Exchange). In connection with the Travel + Leisure brand acquisition the Company updated the names and composition of its reportable segments to better align with how the segments are managed. 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 Travel and Membership segment operates a variety of travel businesses, including three vacation exchange brands, a home exchange network, travel technology platforms, travel memberships, and direct-to-consumer rentals. With the formation of Travel + Leisure Group the Company decided that the operations of its Extra Holidays business, which focuses on direct to consumer bookings, better aligns with the operations of this new business line and therefore transitioned the management of the Extra Holidays business to the Travel and Membership segment. As such, the Company reclassified the results of its Extra Holidays business, which was previously reported within the Vacation Ownership segment, into the Travel and Membership segment. This change is reflected in all periods reported. 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/(loss) from continuing operations before Depreciation and amortization, Interest expense (excluding Consumer financing interest), early extinguishment of debt, Interest income (excluding Consumer financing revenues) and income taxes. Adjusted EBITDA also excludes stock-based compensation costs, separation and restructuring costs, legacy items, transaction costs for acquisitions and divestitures, impairments, gains and losses on sale/disposition of business, and items that meet the conditions of unusual and/or infrequent. Legacy items include the resolution of and adjustments to certain contingent liabilities related to acquisitions of continuing businesses and dispositions, including the separation of Wyndham Hotels and Cendant, and the sale of the vacation rentals businesses. 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.
The following tables present the Company’s segment information (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
Net revenues
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Vacation Ownership
|
$
|
599
|
|
|
$
|
238
|
|
|
$
|
1,048
|
|
|
$
|
641
|
|
Travel and Membership
|
204
|
|
|
106
|
|
|
387
|
|
|
265
|
|
Total reportable segments
|
803
|
|
|
344
|
|
|
1,435
|
|
|
906
|
|
Corporate and other (a)
|
(6)
|
|
|
(1)
|
|
|
(10)
|
|
|
(5)
|
|
Total Company
|
$
|
797
|
|
|
$
|
343
|
|
|
$
|
1,425
|
|
|
$
|
901
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
Reconciliation of Net income/(loss) to Adjusted EBITDA
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Net income/(loss) attributable to Travel + Leisure shareholders
|
$
|
72
|
|
|
$
|
(164)
|
|
|
$
|
100
|
|
|
$
|
(298)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on disposal of discontinued business, net of income taxes
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
Provision/(benefit) for income taxes
|
31
|
|
|
11
|
|
|
37
|
|
|
(33)
|
|
Depreciation and amortization
|
31
|
|
|
31
|
|
|
63
|
|
|
62
|
|
Interest expense
|
47
|
|
|
46
|
|
|
100
|
|
|
87
|
|
Interest (income)
|
(1)
|
|
|
(2)
|
|
|
(1)
|
|
|
(4)
|
|
Stock-based compensation
|
9
|
|
|
6
|
|
|
16
|
|
|
7
|
|
Legacy items
|
1
|
|
|
1
|
|
|
4
|
|
|
2
|
|
COVID-19 related costs (b)
|
1
|
|
|
26
|
|
|
2
|
|
|
38
|
|
Asset impairments (c)
|
—
|
|
|
38
|
|
|
—
|
|
|
48
|
|
Restructuring
|
—
|
|
|
23
|
|
|
(1)
|
|
|
25
|
|
Exchange inventory write-off
|
—
|
|
|
—
|
|
|
—
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
$
|
193
|
|
|
$
|
16
|
|
|
$
|
322
|
|
|
$
|
(28)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
Adjusted EBITDA
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Vacation Ownership
|
$
|
133
|
|
|
$
|
(12)
|
|
|
$
|
200
|
|
|
$
|
(87)
|
|
Travel and Membership
|
75
|
|
|
35
|
|
|
150
|
|
|
79
|
|
Total reportable segments
|
208
|
|
|
23
|
|
|
350
|
|
|
(8)
|
|
Corporate and other (a)
|
(15)
|
|
|
(7)
|
|
|
(28)
|
|
|
(20)
|
|
Total Company
|
$
|
193
|
|
|
$
|
16
|
|
|
$
|
322
|
|
|
$
|
(28)
|
|
(a)Includes the elimination of transactions between segments.
(b)Reflects severance and other employee costs associated with layoffs due to the COVID-19 workforce reduction offset in part by employee retention credits received in connection with the U.S. CARES Act, ARPA, and similar international programs for wages paid to certain employees despite having operations suspended. This amount does not include costs associated with idle pay.
(c)Includes $5 million of bad debt expense related to a note receivable for the three and six months ended June 30, 2020, included in Operating expenses on the Condensed Consolidated Statements of Income/(Loss).
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets (a)
|
June 30,
2021
|
|
December 31, 2020
|
Vacation Ownership
|
$
|
4,782
|
|
|
$
|
5,000
|
|
Travel and Membership
|
1,472
|
|
|
1,372
|
|
Total reportable segments
|
6,254
|
|
|
6,372
|
|
Corporate and other
|
385
|
|
|
1,241
|
|
|
|
|
|
Total Company
|
$
|
6,639
|
|
|
$
|
7,613
|
|
(a)Excludes investment in consolidated subsidiaries.
20. COVID-19 Related Items
During the three months ended June 30, 2021, the Company had expenses directly related to COVID-19 as detailed in the table below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vacation Ownership
|
|
Travel and Membership
|
|
Corporate
|
|
Consolidated
|
|
Income Statement Classification
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
Provision
|
|
$
|
(26)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(26)
|
|
|
Vacation ownership interest sales
|
Recoveries
|
|
10
|
|
|
—
|
|
|
—
|
|
|
10
|
|
|
Cost/(recovery) of vacation ownership interests
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation related and other
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
COVID-19 related costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total COVID-19
|
|
$
|
(15)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(15)
|
|
|
|
During the six months ended June 30, 2021, the Company had expenses directly related to COVID-19 as detailed in the table below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vacation Ownership
|
|
Travel and Membership
|
|
Corporate
|
|
Consolidated
|
|
Income Statement Classification
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
Provision
|
|
$
|
(26)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(26)
|
|
|
Vacation ownership interest sales
|
Recoveries
|
|
10
|
|
|
—
|
|
|
—
|
|
|
10
|
|
|
Cost/(recovery) of vacation ownership interests
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation related and other
|
|
1
|
|
|
—
|
|
|
1
|
|
|
2
|
|
|
COVID-19 related costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease related
|
|
(1)
|
|
|
—
|
|
|
—
|
|
|
(1)
|
|
|
Restructuring
|
Total COVID-19
|
|
$
|
(16)
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
(15)
|
|
|
|
During the three months ended June 30, 2020, the Company had expenses directly related to COVID-19 as detailed in the table below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vacation Ownership
|
|
Travel and Membership
|
|
Corporate
|
|
Consolidated
|
|
Income Statement Classification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation related and other
|
|
$
|
32
|
|
|
$
|
5
|
|
|
$
|
8
|
|
|
$
|
45
|
|
|
COVID-19 related costs
|
Asset impairments
|
|
8
|
|
|
30
|
|
|
—
|
|
|
38
|
|
|
Asset impairments/
Operating expenses
|
Lease related
|
|
1
|
|
|
22
|
|
|
—
|
|
|
23
|
|
|
Restructuring
|
Total COVID-19
|
|
$
|
41
|
|
|
$
|
57
|
|
|
$
|
8
|
|
|
$
|
106
|
|
|
|
During the six months ended June 30, 2020, the Company had expenses directly related to COVID-19 as detailed in the table below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vacation Ownership
|
|
Travel and Membership
|
|
Corporate
|
|
Consolidated
|
|
Income Statement Classification
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
Provision
|
|
$
|
225
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
225
|
|
|
Vacation ownership interest sales
|
Recoveries
|
|
(55)
|
|
|
—
|
|
|
—
|
|
|
(55)
|
|
|
Cost/(recovery) of vacation ownership interests
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation related and other
|
|
51
|
|
|
5
|
|
|
11
|
|
|
67
|
|
|
COVID-19 related costs
|
Asset impairments
|
|
14
|
|
|
34
|
|
|
—
|
|
|
48
|
|
|
Asset impairments/
Operating expenses
|
Exchange inventory write-off
|
|
—
|
|
|
38
|
|
|
—
|
|
|
38
|
|
|
Operating expenses
|
Lease related
|
|
1
|
|
|
22
|
|
|
—
|
|
|
23
|
|
|
Restructuring
|
Total COVID-19
|
|
$
|
236
|
|
|
$
|
99
|
|
|
$
|
11
|
|
|
$
|
346
|
|
|
|
Allowance for loan losses - Due to the closure of resorts and sales centers and the economic downturn resulting from COVID-19 during the first quarter of 2020, the Company evaluated the potential impact of COVID-19 on its owners’ ability to repay their contract receivables and as a result of higher unemployment, the Company recorded a COVID-19 related allowance for loan losses. This allowance consisted of a $225 million COVID-19 related provision, which was reflected as a reduction to Vacation ownership interest sales and $55 million of estimated recoveries, which were reflected as a reduction to Cost/(recovery) of vacation ownership interests on the Condensed Consolidated Statements of Income/(Loss). The net negative impact of this COVID-19 related allowance on Adjusted EBITDA was $170 million for the six months ended June 30, 2020.
During the second quarter of 2021, the Company analyzed the adequacy of the COVID-19 related allowance consistent with past methodology, and due to the improvement in net new defaults the Company reduced this allowance resulting in a $26 million increase to Vacation ownership interest sales and a corresponding $10 million increase to Cost/(recovery) of vacation ownership interests on the Condensed Consolidated Statements of Income/(Loss). The net positive impact of this allowance release on Adjusted EBITDA was $16 million for the six months ended June 30, 2021. The Company will continue to monitor this reserve as more information becomes available. Refer to Note 7—Vacation Ownership Contract Receivables for additional details.
Employee compensation related and other - During the three and six months ended June 30, 2020, these costs included $39 million and $59 million related to severance and other employee costs resulting from the layoffs, salary and benefits continuation for certain employees while operations were suspended, and vacation payments associated with furloughed employees; and $6 million and $8 million of expenses during the three and six months ended June 30, 2020 related to renegotiating or exiting certain agreements and other professional fees; partially offset by $21 million of employee retention credits earned in connection with government programs, primarily the CARES Act.
In connection with these actions the Company recorded COVID-19 employee-related liabilities which are included within Accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets. The activity associated with these COVID-19 related liabilities is summarized as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability as of
|
|
|
|
|
|
|
|
Liability as of
|
|
December 31, 2020
|
|
Costs Recognized
|
|
Cash Payments
|
|
|
|
June 30, 2021
|
COVID-19 employee-related
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
(5)
|
|
|
|
|
$
|
1
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
(5)
|
|
|
|
|
$
|
1
|
|
Asset impairments - During the three and six months ended June 30, 2020, the Company incurred $38 million and $48 million of COVID-19 related impairments. These impairments include $33 million and $44 million recorded within Asset impairments on the Condensed Consolidated Statements of Income/(Loss) during each period as discussed in Note 21—Impairments, and $5 million included in Operating expenses during the second quarter of 2020.
Exchange inventory write-off - During the six months ended June 30, 2020, the Company wrote-off $38 million of exchange inventory, which is included in Operating expenses on the Condensed Consolidated Statements of Income/(Loss) as discussed in Note 8—Inventory.
Lease related - The Company also recognized $23 million of restructuring charges during the second quarter of 2020. This was driven by $22 million related to the New Jersey lease discussed in Note 22—Restructuring.
21. Impairments
During the three and six months ended June 30, 2020, the Company recorded $33 million and $44 million of asset impairments, all of which were COVID-19 related. In the first quarter of 2020, there were $6 million of impairments at the Vacation Ownership segment related to prepaid development costs and undeveloped land and $4 million at the Travel and Membership segment related to the Love Home Swap trade name. In the second quarter of 2020, the Company recorded a $24 million impairment at the Travel and Membership segment related to the New Jersey lease discussed in Note 22—Restructuring and the associated furniture, fixtures and equipment, a $6 million impairment for equity investments held at the Travel and Membership segment, and a $3 million impairment at the Vacation Ownership segment related to lease assets and furniture, fixtures and equipment. These impairments are included within the Asset impairments on the Condensed Consolidated Statements of Income/(Loss).
There were no impairment charges for the three and six months ended June 30, 2021.
22. Restructuring
2020 Restructuring Plans
During 2020, the Company recorded $37 million of restructuring charges, $36 million of which were COVID-19 related. Due to the impact of COVID-19, the Company decided in the second quarter of 2020 to abandon the remaining portion of its administrative offices in New Jersey. The Company was notified in the second quarter of 2020 that Wyndham Hotels exercised its early termination rights under the sublease agreement. As a result, the Company recorded $22 million of restructuring charges associated with non-lease components of the office space and $24 million of impairment charges associated with the write-off of right-of-use assets and furniture, fixtures and equipment at its Travel and Membership segment. The Company also recognized $12 million of lease-related charges due to the renegotiation of an agreement and $2 million of facility-related restructuring charges associated with closed sales centers at its Vacation Ownership segment. The Travel and Membership segment additionally recognized $1 million in employee-related expenses associated with the consolidation of a shared service center. During 2020, the Company reduced its restructuring liability by $12 million of cash payments. The remaining 2020 restructuring liability of $27 million is expected to be paid by the end of 2029.
The Company implemented other restructuring plans prior to 2020. The remaining liability of less than $1 million as of June 30, 2021, is mostly personnel-related and is expected to be paid by the end of 2021.
The activity associated with the Company’s restructuring plans is summarized as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability as of
|
|
|
|
|
|
|
|
Liability as of
|
|
December 31, 2020
|
|
Costs Recognized
|
|
Cash Payments
|
|
Other
|
|
June 30, 2021
|
Personnel-related
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
(1)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Facility-related
|
23
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
23
|
|
Marketing-related
|
2
|
|
|
(1)
|
|
(a)
|
—
|
|
|
3
|
|
(b)
|
4
|
|
|
$
|
26
|
|
|
$
|
(1)
|
|
|
$
|
(1)
|
|
|
$
|
3
|
|
|
$
|
27
|
|
(a)Includes $1 million reversal of expense related to the reimbursement of prepaid licensing fees that were previously written-off at the Vacation Ownership segment.
(b)Includes $2 million reimbursement of termination payments and $1 million reimbursement of license fees at the Vacation Ownership segment.
23. Transactions with Former Parent and Former Subsidiaries
Matters Related to Cendant
Pursuant to the Separation and Distribution Agreement with Cendant (the Company’s former parent company), 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 assumed 37.5% of the responsibility while Cendant’s former subsidiary Realogy is responsible for the remaining 62.5%. In connection with the Spin-off, Wyndham Hotels agreed to retain one-third of Cendant’s contingent and other corporate liabilities and associated costs; therefore, Travel + Leisure is effectively responsible for 25% of such matters subsequent to the separation. Since Cendant’s separation, Cendant has settled the majority of the lawsuits that were pending on the date of the separation.
As of June 30, 2021, the Cendant separation and related liabilities of $13 million are comprised of $12 million for tax related liabilities and $1 million for other contingent and corporate liabilities. As of December 31, 2020, the Company had $13 million of Cendant separation-related liabilities. These liabilities are included within Accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets.
Matters Related to Wyndham Hotels
In connection with the Spin-off on May 31, 2018, Travel + Leisure entered into several agreements with Wyndham Hotels that govern the relationship of the parties following the separation including the Separation and Distribution Agreement, the Employee Matters Agreement, the Tax Matters Agreement, the Transition Services Agreement and the License, Development and Noncompetition Agreement.
On January 4, 2021, the Company and Wyndham Hotels entered into a letter agreement pursuant to which, among other
things Wyndham Hotels waived its right to enforce certain noncompetition covenants in the License, Development and Noncompetition Agreement.
In accordance with these agreements governing the relationship between Travel + Leisure and Wyndham Hotels, Travel + Leisure 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, Travel + Leisure 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.
Travel + Leisure 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. For both the three and six months ended June 30, 2020, transition service agreement expenses were less than $1 million and included within General and administrative expense on the Condensed Consolidated Statements of Income/(Loss). These transition services ended in 2020.
Matters Related to the European Vacation Rentals Business
In connection with the sale of the Company’s European vacation rentals business to Awaze Limited (“Awaze”), formerly Compass IV Limited, an affiliate of Platinum Equity, LLC, 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. Awaze has provided an indemnification to Travel + Leisure in the event that the post-closing credit support is enforced or called upon.
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 denominated in pound sterling of $46 million. The estimated fair value of the guarantee was $22 million as of June 30, 2021. The Company maintains a $7 million receivable from Wyndham Hotels for its portion of the guarantee.
In addition, the Company agreed to indemnify Awaze 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 was $42 million at June 30, 2021. The Company has a $14 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 mainly denominated in pound sterling of up to an approximate $81 million on a perpetual basis. These guarantees totaled $39 million at June 30, 2021. Travel + Leisure is responsible for two-thirds of these guarantees.
As part of this agreement Wyndham Hotels is required to maintain minimum credit ratings which increased to Ba1 for Moody’s Investors Services, Inc. (“Moody’s”) and BB+ for Standard & Poor’s Rating Services (“S&P”) on May 9, 2020. In April 2020, S&P downgraded Wyndham Hotels’ credit rating from BB+ to BB. Although any ultimate exposure relative to indemnities retained from the European vacation rentals sale will be shared two-thirds by Travel + Leisure and one-third by Wyndham Hotels, as the selling entity, Travel + Leisure is responsible for administering additional security to enhance corporate guarantees in the event either company falls below a certain credit rating threshold. As a result of the Wyndham Hotels credit ratings downgrade, during 2020, the Company posted a £58 million surety bond and a £36 million letter of credit ($80 million and $49 million as of June 30, 2021) which will be maintained until such time that either companies’ S&P and Moody’s credit rating improves to BB+/Ba1.
The estimated fair value of the guarantees and indemnifications for which Travel + Leisure is responsible related to the sale of the European vacation rentals business at June 30, 2021, including the two-thirds portion related to guarantees provided by Wyndham Hotels, totaled $90 million and was recorded in Accrued expenses and other liabilities and total receivables of $21 million were included in Other assets on the Condensed Consolidated Balance Sheets, representing the portion of these guarantees and indemnifications for which Wyndham Hotels is responsible.
During 2019, Awaze proposed certain post-closing adjustments of $44 million which could serve to reduce the net consideration received from the sale of the European vacation rentals business. The Company finds no basis for such adjustments. In the third quarter of 2020, Awaze filed a claim in the English court. The Company filed its defense on September 25, 2020, in which it denied that any sum was due.
Travel + Leisure entered into a transition service agreement with Awaze, 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 both the three and six months ended June 30, 2020, transition service agreement expenses were less than $1 million and transition service agreement income was less than $1 million. Transition service agreement expenses were included in General and administrative expense and transition service income was included in Net revenues on the Condensed Consolidated Statements of Income/(Loss). These transition services ended in 2020.
Matters Related to the North American Vacation Rentals Business
In connection with the sale of the North American vacation rentals business, the Company agreed to indemnify Vacasa LLC (“Vacasa”) against certain claims and assessments, including income tax and other tax matters related to the operations of the North American vacations rentals business for the periods prior to the transaction. The estimated fair value of the indemnifications was $2 million, which was included in Accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets at June 30, 2021.
In connection with the sale of the North American vacations rentals business in the fourth quarter of 2019, the Company entered into a transition service agreement with Vacasa, pursuant to which the companies agreed to provide each other certain transitional services including human resources, facilities, payroll, information technology, information management and related services, treasury, and finance on an interim, transitional basis. During the six months ended June 30, 2021, transition service agreement expenses were less than $1 million and transition service agreement income was less than $1 million. During both the three and six months ended June 30, 2020, transition service agreement expenses were $1 million and transition service agreement income was $1 million. Transition service agreement expenses were included in General and administrative expense and transition service income was included in Other revenue on the Condensed Consolidated Statements of Income/(Loss). These transition services ended in February 2021.
24. 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, Florida. On July 8, 2020, the Company acquired the completed vacation ownership property for $45 million. This agreement was subsequently amended increasing the purchase to $47 million.
The Company occasionally sublets an aircraft from its former CEO and current Chairman of the Board of Directors for business travel through a timesharing arrangement. The Company incurred less than $1 million of expenses as of June 30, 2020 and did not sublet the aircraft during the six months ended June 30, 2021.