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
Travel + Leisure Co. and its subsidiaries (collectively, “Travel + Leisure Co.,” or the “Company”) is a global provider of hospitality services and travel products. The Company has two reportable segments: Vacation Ownership and Travel and Membership.
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. The following brands operate under the Wyndham Destinations business line: Club Wyndham, WorldMark by Wyndham, Shell Vacations Club, Margaritaville Vacation Club by Wyndham, Presidential Reserve by Wyndham, and Extra Holidays. Due to changes in organizational structure in the second quarter of 2022, the management of Extra Holidays was transitioned to the Vacation Ownership segment. As such, the Company reclassified the results of Extra Holidays, which was previously reported within the Travel and Membership segment, into the Vacation Ownership segment. Prior period segment information has been updated to reflect this change.
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 Travel + Leisure Group business lines. 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 Travel + Leisure GO travel club.
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 Co., as well as the entities in which Travel + Leisure Co. 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 updated to reflect the aforementioned reclassification of the Extra Holidays business into the Vacation Ownership 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 2021 Consolidated Financial Statements included in its Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 23, 2022.
2. New Accounting Pronouncements
Recently Issued Accounting Pronouncements
Government Assistance. In November 2021, the Financial Accounting Standards Board (“FASB”) issued guidance which requires business entities to provide certain disclosures when they have received government assistance and used a grant or contribution accounting model by analogy to other accounting guidance. The guidance is effective for financial statements issued for annual periods beginning after December 15, 2021. The adoption of this guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements or related disclosures.
Recently Adopted Accounting Pronouncements
Contract Assets and Contract Liabilities from Contracts with Customers Acquired in a Business Combination. In October 2021, the FASB issued guidance which requires companies to apply Accounting Standards Codification (“ASC”) 606 - Revenue from Contracts with Customers to recognize and measure contract assets and contract liabilities from contracts with customers acquired in a business combination. This creates an exception to the general recognition and measurement principle in ASC 805 - Business Combinations. This generally will result in companies recognizing contract assets and contract liabilities at amounts consistent with those recorded by the acquiree immediately before the acquisition date. This guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The amendments should be applied prospectively to business combinations occurring on or after the effective date. Early adoption is permitted. The Company early adopted this guidance during the third quarter of 2022, and it 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. The Company reduces its management fees for amounts it has paid to the property owners’ association that reflect maintenance fees for VOIs for which it retains ownership, as the Company has concluded that such payments are consideration payable to a customer.
Property management fee revenues are recognized when the services are performed and are recorded as a component of Service and membership fees on the Condensed Consolidated Statements of Income. Property management revenues, which are comprised of management fee revenue and reimbursable revenue were (in millions) (a):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Management fee revenues | $ | 106 | | | $ | 95 | | | $ | 313 | | | $ | 283 | |
| Reimbursable revenues | 85 | | | 81 | | | 252 | | | 220 | |
| Property management revenues | $ | 191 | | | $ | 176 | | | $ | 565 | | | $ | 503 | |
(a)Reflects the impact of reclassifying the Extra Holidays business line from the Travel and Membership segment to the Vacation Ownership segment.
One of the associations that the Company manages paid its Travel and Membership segment $7 million and $9 million for exchange services during the three months ended September 30, 2022 and 2021, and $24 million and $23 million during the nine months ended September 30, 2022 and 2021.
Travel and Membership
Travel and Membership derives a majority of its 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 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 travel club members. Revenue is recognized when these transactions have been confirmed, net of expected cancellations, except in certain transactions where the Company has a performance obligation that is not satisfied until the time of stay.
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.
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 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 for its Vacation Ownership segment and RCI Elite Rewards revenues for its Travel and Membership segment 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 consisted of (in millions): | | | | | | | | | | | |
| September 30,
2022 | | December 31, 2021 |
| Deferred subscription revenue | $ | 165 | | | $ | 166 | |
| Deferred VOI trial package revenue | 94 | | | 85 | |
| Deferred VOI incentive revenue | 66 | | | 55 | |
Deferred exchange-related revenue (a) | 57 | | | 61 | |
| Deferred co-branded credit card programs revenue | 10 | | | 12 | |
| Deferred other revenue | 3 | | | 3 | |
| Total | $ | 395 | | | $ | 382 | |
(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, but may extend longer for certain programs. 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, but may extend longer for certain programs.
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 and rent travel accommodations which are recognized on a straight-line basis over the contract period, generally within one year. Deferred revenue also includes other leisure-related service and product revenues which are recognized as customers utilize the associated benefits.
Changes in contract liabilities follow (in millions): | | | | | | | | | | | |
| Nine Months Ended |
| September 30, |
| 2022 | | 2021 |
| Beginning balance | $ | 382 | | | $ | 448 | |
| Additions | 218 | | | 199 | |
| Revenue recognized | (205) | | | (253) | |
| | | |
| Ending balance | $ | 395 | | | $ | 394 | |
Capitalized Contract Costs
The 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 September 30, 2022 and December 31, 2021, these capitalized costs were $32 million and $28 million and are included within Other assets on the Condensed Consolidated Balance Sheets.
The 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 September 30, 2022 and December 31, 2021, these capitalized costs were $18 million and $19 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 will satisfy the performance obligation and when the customer will pay for that good or service will be 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):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 10/1/2022 - 9/30/2023 | | 10/1/2023 - 9/30/2024 | | 10/1/2024 - 9/30/2025 | | Thereafter | | Total |
| Subscription revenue | | $ | 95 | | | $ | 38 | | | $ | 16 | | | $ | 16 | | | $ | 165 | |
| VOI trial package revenue | | 88 | | | 2 | | | 2 | | | 2 | | | 94 | |
| VOI incentive revenue | | 66 | | | — | | | — | | | — | | | 66 | |
| Exchange-related revenue | | 53 | | | 3 | | | 1 | | | — | | | 57 | |
| Co-branded credit card programs revenue | | 3 | | | 3 | | | 3 | | | 1 | | | 10 | |
| Other revenue | | 3 | | | — | | | — | | | — | | | 3 | |
| Total | | $ | 308 | | | $ | 46 | | | $ | 22 | | | $ | 19 | | | $ | 395 | |
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):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Vacation Ownership | | | | | | | |
Vacation ownership interest sales (b) | $ | 403 | | | $ | 344 | | | $ | 1,099 | | | $ | 810 | |
| Property management fees and reimbursable revenues | 191 | | | 176 | | | 565 | | | 503 | |
| Consumer financing | 104 | | | 103 | | | 302 | | | 304 | |
| Fee-for-Service commissions | 36 | | | 28 | | | 87 | | | 69 | |
| Ancillary revenues | 20 | | | 14 | | | 45 | | | 36 | |
| Total Vacation Ownership | 754 | | | 665 | | | 2,098 | | | 1,722 | |
| | | | | | | |
| Travel and Membership | | | | | | | |
| Transaction revenues | 129 | | | 122 | | | 411 | | | 390 | |
| Subscription revenues | 47 | | | 43 | | | 137 | | | 127 | |
| Ancillary revenues | 7 | | | 10 | | | 24 | | | 27 | |
| Total Travel and Membership | 183 | | | 175 | | | 572 | | | 544 | |
| | | | | | | |
| Corporate and other | | | | | | | |
| | | | | | | |
| Eliminations | — | | | (1) | | | (2) | | | (2) | |
| Total Corporate and other | — | | | (1) | | | (2) | | | (2) | |
| | | | | | | |
| Net revenues | $ | 937 | | | $ | 839 | | | $ | 2,668 | | | $ | 2,264 | |
(a)This table reflects the reclassification of Extra Holidays from the Travel and Membership segment into the Vacation Ownership segment for all periods presented. Extra Holidays revenue is included within Property management fees and reimbursable revenues.
(b)The Company increased its loan loss allowance by $205 million during 2020, due to an expected increase in net new defaults driven by higher unemployment associated with the novel coronavirus global pandemic (“COVID-19”). During the third quarter of 2021, the Company analyzed the adequacy of this COVID-19 related allowance consistent with past methodology, resulting in a $21 million and $47 million reversal which is reflected as an increase in Vacation ownership interest sales on the Condensed Consolidated Statements of Income during the three and nine months ended September 30, 2021.
4. Earnings Per Share
The computations of basic and diluted earnings per share (“EPS”) are based on Net income attributable to Travel + Leisure Co. 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 | | Nine Months Ended |
| September 30, | | September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Net income from continuing operations attributable to Travel + Leisure Co. shareholders | $ | 116 | | | $ | 101 | | | $ | 266 | | | $ | 203 | |
| | | | | | | |
| Loss on disposal of discontinued business attributable to Travel + Leisure Co. shareholders, net of income taxes | — | | | — | | | — | | | (2) | |
| Net income attributable to Travel + Leisure Co. shareholders | $ | 116 | | | $ | 101 | | | $ | 266 | | | $ | 201 | |
| | | | | | | |
Basic earnings per share (a) | | | | | | | |
| Continuing operations | $ | 1.39 | | | $ | 1.16 | | | $ | 3.15 | | | $ | 2.35 | |
| Discontinued operations | — | | | — | | | — | | | (0.02) | |
| $ | 1.39 | | | $ | 1.16 | | | $ | 3.15 | | | $ | 2.33 | |
| | | | | | | |
Diluted earnings per share (a) | | | | | | | |
| Continuing operations | $ | 1.38 | | | $ | 1.15 | | | $ | 3.12 | | | $ | 2.33 | |
| Discontinued operations | — | | | — | | | — | | | (0.03) | |
| $ | 1.38 | | | $ | 1.15 | | | $ | 3.12 | | | $ | 2.30 | |
| | | | | | | |
| Basic weighted average shares outstanding | 83.0 | | | 86.6 | | | 84.6 | | | 86.5 | |
Stock-settled appreciation rights (“SSARs”), RSUs,(b) PSUs (c) and NQs (d) | 0.6 | | | 0.8 | | | 0.9 | | | 0.8 | |
Diluted weighted average shares outstanding (e) | 83.6 | | | 87.4 | | | 85.5 | | | 87.3 | |
| | | | | | | |
| Dividends: | | | | | | | |
| Aggregate dividends paid to shareholders | $ | 33 | | | $ | 26 | | | $ | 103 | | | $ | 79 | |
(a)Earnings per share amounts are calculated using whole numbers.
(b)Excludes 0.7 million and 0.6 million of restricted stock units (“RSUs”) that would have been anti-dilutive to EPS for the three and nine months ended September 30, 2022 and 0.4 million and 0.3 million of anti-dilutive RSUs for the three and nine months ended September 30, 2021. These shares could potentially dilute EPS in the future.
(c)Excludes performance-vested restricted stock units (“PSUs”) of 0.5 million for both the three and nine months ended September 30, 2022 and 0.4 million PSUs for both the three and nine months ended September 30, 2021, as the Company has not met the required performance metrics. These PSUs could potentially dilute EPS in the future.
(d)Excludes 2.0 million and 1.1 million of outstanding non-qualified stock options (“NQs”) that would have been anti-dilutive to EPS for both the three and nine months ended September 30, 2022 and 1.4 million of outstanding NQs for both the three and nine months ended September 30, 2021. These outstanding NQs 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.
Share Repurchase Program
The following table summarizes stock repurchase activity under the current share repurchase program (in millions):
| | | | | | | | | | | |
| Shares | | Cost |
| As of December 31, 2021 | 111.8 | | | $ | 5,753 | |
| Repurchases | 5.3 | | | 243 | |
| As of September 30, 2022 | 117.1 | | | $ | 5,996 | |
During the second quarter of 2022, the Company’s Board of Directors increased the authorization for the Company’s share repurchase program by $500 million. As of September 30, 2022, the Company had $585 million of remaining availability under its program.
5. Acquisitions
Travel + Leisure. On January 5, 2021, the Company acquired the Travel + Leisure brand from Meredith Corporation for $100 million, $35 million of which was paid at closing and is reflected as cash used in Investing activities on the Condensed Consolidated Statements of Cash Flows. The Company made additional payments of $20 million each in the second quarter of 2021 and 2022, the majority of which is reflected as cash used in Financing activities on the Condensed Consolidated Statements of Cash Flows. 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. The Company acquired the Travel + Leisure brand to accelerate its strategic plan to broaden its reach with the launch of new travel services, expand its membership travel business, and amplify the global visibility of its leisure travel products.
Alliance Reservations Network. On August 7, 2019, the Company acquired all of the equity of ARN. ARN, which is reported within the Travel and Membership segment, provides private-label travel booking technology solutions. This acquisition was undertaken for the purpose of accelerating growth at Travel and Membership by increasing the offerings available to its members and affiliates. ARN was acquired for $102 million ($97 million net of cash acquired). The fair value of purchase consideration was comprised of: (i) $48 million paid in cash at closing and $11 million paid in each of the third quarters of 2020 and 2021; (ii) $24 million of Travel + Leisure Co. stock (721,450 shares at a weighted average price per share of $32.51); and (iii) $10 million of contingent consideration based on achieving certain financial and operational metrics.
During the third quarter of 2022, the Company reduced its accrual for contingent consideration by $10 million to reflect the fair value based on expected performance. This amount was included within Other income, net on the Condensed Consolidated Statements of Income.
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 nine months ended September 30, 2021.
During the nine months ended September 30, 2022, the Company had $6 million of Net cash used in investing activities from discontinued operations on the Condensed Consolidated Statements of Cash Flows related to the settlement of post-closing adjustment claims associated with the sale of the European vacation rentals business. See Note 22—Transactions with Former Parent and Former Subsidiaries for additional details.
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):
| | | | | | | | | | | |
| September 30,
2022 | | December 31,
2021 |
| Vacation ownership contract receivables: | | | |
Securitized (a) | $ | 2,031 | | | $ | 2,061 | |
Non-securitized (b) | 866 | | | 758 | |
| Vacation ownership contract receivables, gross | 2,897 | | | 2,819 | |
| Less: allowance for loan losses | 539 | | | 510 | |
| Vacation ownership contract receivables, net | $ | 2,358 | | | $ | 2,309 | |
(a)Excludes $16 million and $17 million of accrued interest on VOCRs as of September 30, 2022 and December 31, 2021, which are included in Trade receivables, net on the Condensed Consolidated Balance Sheets.
(b)Excludes $8 million and $5 million of accrued interest on VOCRs as of September 30, 2022 and December 31, 2021, which are included in Trade receivables, net on the Condensed Consolidated Balance Sheets.
During the three and nine months ended September 30, 2022, the Company’s securitized VOCRs generated interest income of $73 million and $214 million. During the three and nine months ended September 30, 2021, the Company’s securitized VOCRs generated interest income of $76 million and $232 million. Such interest income is included within Consumer financing revenue on the Condensed Consolidated Statements of Income.
During the nine months ended September 30, 2022 and 2021, the Company had net VOCR originations of $922 million and $544 million, and received principal collections of $639 million and $604 million.
The weighted average interest rate on outstanding VOCRs was 14.7% and 14.5% as of September 30, 2022 and December 31, 2021.
The activity in the allowance for loan losses on VOCRs was as follows (in millions):
| | | | | | | | | | | |
| Nine Months Ended |
| September 30, |
| 2022 | | 2021 |
| Allowance for loan losses, beginning balance | $ | 510 | | | $ | 693 | |
| Provision for loan losses, net | 216 | | | 120 | |
| Contract receivables write-offs, net | (187) | | | (248) | |
| Allowance for loan losses, ending balance | $ | 539 | | | $ | 565 | |
Due to the economic downturn resulting from the novel coronavirus global pandemic (“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. The Company based its COVID-19 loan loss estimate upon historical data on the relationship between unemployment rates and net new defaults observed during the most recent recession in 2008. 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 of vacation ownership interests on the Condensed Consolidated Statements of Income. Since the first quarter of 2020, the Company has performed quarterly evaluations of the impact of COVID-19 on its owners’ ability to repay their contract receivables and, as a result of improvement in net new defaults and lower than expected unemployment rates, reduced this allowance resulting in a $111 million increase to Vacation ownership interest sales with a corresponding $40 million increase in Cost of vacation ownership interests. Included within these amounts are partial allowance reversals during the three and nine months ended September 30, 2021 resulting in increases of $21 million and $47 million to Vacation ownership interest sales and corresponding increases of $8 million and $17 million to Cost of vacation ownership interests on the Condensed Consolidated Statements of Income during the prior year. After considering write-offs and the allowance for remaining likely defaults associated with loans that were granted payment deferrals, the Company has not had a COVID-19 related allowance since December 31, 2021.
The Company recorded net provisions for loan losses of $91 million and $216 million as a reduction of net revenues during the three and nine months ended September 30, 2022, and $49 million and $120 million for the three and nine months ended September 30, 2021.
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 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 September 30, 2022 |
| 700+ | | 600-699 | | <600 | | No Score | | Asia Pacific | | Total |
| Current | $ | 1,705 | | | $ | 731 | | | $ | 91 | | | $ | 78 | | | $ | 136 | | | $ | 2,741 | |
| 31 - 60 days | 29 | | | 32 | | | 12 | | | 5 | | | 1 | | | 79 | |
| 61 - 90 days | 13 | | | 20 | | | 10 | | | 2 | | | — | | | 45 | |
| 91 - 120 days | 7 | | | 13 | | | 10 | | | 2 | | | — | | | 32 | |
Total (a) | $ | 1,754 | | | $ | 796 | | | $ | 123 | | | $ | 87 | | | $ | 137 | | | $ | 2,897 | |
| | | | | | | | | | | |
| As of December 31, 2021 |
| 700+ | | 600-699 | | <600 | | No Score | | Asia Pacific | | Total |
| Current | $ | 1,630 | | | $ | 734 | | | $ | 98 | | | $ | 72 | | | $ | 169 | | | $ | 2,703 | |
| 31 - 60 days | 17 | | | 24 | | | 10 | | | 3 | | | 1 | | | 55 | |
| 61 - 90 days | 9 | | | 12 | | | 7 | | | 1 | | | — | | | 29 | |
| 91 - 120 days | 9 | | | 12 | | | 9 | | | 1 | | | 1 | | | 32 | |
Total (a) | $ | 1,665 | | | $ | 782 | | | $ | 124 | | | $ | 77 | | | $ | 171 | | | $ | 2,819 | |
(a)Includes contracts under temporary deferment (up to 180 days) of less than $1 million and $7 million as of September 30, 2022 and December 31, 2021.
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. 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.
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 September 30, 2022 |
| 700+ | | 600-699 | | <600 | | No Score | | Asia Pacific | | Total |
| 2022 | $ | 643 | | | $ | 244 | | | $ | 9 | | | $ | 23 | | | $ | 41 | | | $ | 960 | |
| 2021 | 315 | | | 178 | | | 32 | | | 6 | | | 20 | | | 551 | |
| 2020 | 153 | | | 69 | | | 13 | | | 5 | | | 15 | | | 255 | |
| 2019 | 221 | | | 111 | | | 27 | | | 16 | | | 21 | | | 396 | |
| 2018 | 180 | | | 83 | | | 17 | | | 13 | | | 16 | | | 309 | |
| Prior | 242 | | | 111 | | | 25 | | | 24 | | | 24 | | | 426 | |
| Total | $ | 1,754 | | | $ | 796 | | | $ | 123 | | | $ | 87 | | | $ | 137 | | | $ | 2,897 | |
| | | | | | | | | | | |
| As of December 31, 2021 |
| 700+ | | 600-699 | | <600 | | No Score | | Asia Pacific | | Total |
| 2021 | $ | 534 | | | $ | 221 | | | $ | 11 | | | $ | 11 | | | $ | 38 | | | $ | 815 | |
| 2020 | 224 | | | 105 | | | 17 | | | 6 | | | 38 | | | 390 | |
| 2019 | 324 | | | 168 | | | 37 | | | 19 | | | 33 | | | 581 | |
| 2018 | 234 | | | 117 | | | 25 | | | 14 | | | 24 | | | 414 | |
| 2017 | 157 | | | 76 | | | 15 | | | 11 | | | 14 | | | 273 | |
| Prior | 192 | | | 95 | | | 19 | | | 16 | | | 24 | | | 346 | |
| Total | $ | 1,665 | | | $ | 782 | | | $ | 124 | | | $ | 77 | | | $ | 171 | | | $ | 2,819 | |
8. Inventory
Inventory consisted of (in millions):
| | | | | | | | | | | |
| September 30,
2022 | | December 31,
2021 |
| Completed VOI inventory | $ | 929 | | | $ | 998 | |
| Estimated VOI recoveries | 192 | | | 187 | |
| VOI construction in process | 14 | | | 13 | |
| Inventory sold subject to repurchase | 6 | | | 13 | |
| Vacation exchange credits and other | 4 | | | 4 | |
| Land held for VOI development | 1 | | | 1 | |
| Total inventory | $ | 1,146 | | | $ | 1,216 | |
As VOI inventory is completed it is transferred into property and equipment until such units are registered and made available for sale. Once registered and available for sale, the units are then transferred back into completed inventory. The Company had net transfers of VOI inventory to property and equipment of $91 million and $56 million during the nine months ended September 30, 2022 and 2021.
Inventory Obligations
The Company has entered into inventory sale transactions with third-party developers for which the Company has conditional rights and 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 is unable to account for these transactions as sales.
The following table summarizes the activity related to the Company's inventory obligations, including repurchase obligations (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Atlanta (a) (b) | | Las Vegas (a) | | Moab (a) | | Orlando (a) | | Other (c) | | Total |
| December 31, 2021 | | | $ | — | | | $ | 13 | | | $ | — | | | $ | — | | | $ | 1 | | | $ | 14 | |
| Purchases | | | 67 | | | 28 | | | — | | | — | | | 46 | | | 141 | |
| Payments | | | (67) | | | (35) | | | — | | | — | | | (38) | | | (140) | |
| September 30, 2022 | | | $ | — | | | $ | 6 | | | $ | — | | | $ | — | | | $ | 9 | | | $ | 15 | |
| | | | | | | | | | | | | |
| December 31, 2020 | | | $ | — | | | $ | 13 | | | $ | 31 | | | $ | 22 | | | $ | 17 | | | $ | 83 | |
| Purchases | | | — | | | 2 | | | 25 | | | 1 | | | 55 | | | 83 | |
| Payments | | | — | | | (2) | | | (56) | | | (5) | | | (61) | | | (124) | |
| September 30, 2021 | | | $ | — | | | $ | 13 | | | $ | — | | | $ | 18 | | | $ | 11 | | | $ | 42 | |
(a)Included in Accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets.
(b)Represents vacation ownership inventory and property and equipment in Atlanta, Georgia, acquired from a third-party developer.
(c)Included in Accounts payable on the Condensed Consolidated Balance Sheets.
In connection with an inventory sale transaction, the Company has committed to repurchase completed property located in Las Vegas, Nevada, from a third-party developer. The maximum potential future payments that the Company may be required to make under this commitment was $30 million as of September 30, 2022.
9. Property and Equipment
Property and equipment, net consisted of (in millions):
| | | | | | | | | | | |
| September 30,
2022 | | December 31, 2021 |
| Building and leasehold improvements | $ | 743 | | | $ | 653 | |
| Capitalized software | 734 | | | 707 | |
| Furniture, fixtures and equipment | 205 | | | 204 | |
| Land | 31 | | | 30 | |
| Finance leases | 25 | | | 20 | |
| Construction in progress | 12 | | | 18 | |
| Total property and equipment | 1,750 | | | 1,632 | |
| Less: accumulated depreciation and amortization | 1,014 | | | 943 | |
| Property and equipment, net | $ | 736 | | | $ | 689 | |
10. Debt
The Company’s indebtedness consisted of (in millions):
| | | | | | | | | | | |
| September 30,
2022 | | December 31,
2021 |
Non-recourse vacation ownership debt: (a) | | | |
Term notes (b) | $ | 1,511 | | | $ | 1,614 | |
USD bank conduit facility (due July 2024) (c) | 269 | | | 190 | |
AUD/NZD bank conduit facility (due April 2023) (d) | 102 | | | 130 | |
| Total | $ | 1,882 | | | $ | 1,934 | |
| | | |
Debt: (e) | | | |
$1.0 billion secured revolving credit facility (due October 2026) (f) | $ | 12 | | | $ | — | |
$300 million secured term loan B (due May 2025) (g) | 287 | | | 288 | |
$400 million 3.90% secured notes (due March 2023) (h) | 400 | | | 401 | |
| $300 million 5.65% secured notes (due April 2024) | 299 | | | 299 | |
$350 million 6.60% secured notes (due October 2025) (i) | 346 | | | 345 | |
| $650 million 6.625% secured notes (due July 2026) | 644 | | | 643 | |
$400 million 6.00% secured notes (due April 2027) (j) | 406 | | | 407 | |
| $650 million 4.50% secured notes (due December 2029) | 642 | | | 641 | |
| $350 million 4.625% secured notes (due March 2030) | 346 | | | 346 | |
| Finance leases | 9 | | | 9 | |
| | | |
| Total | $ | 3,391 | | | $ | 3,379 | |
(a)Represents non-recourse debt that is securitized through bankruptcy-remote special purpose entities, the creditors of which have no recourse to the Company for principal and interest. These outstanding borrowings (which legally are not liabilities of the Company) are collateralized by $2.15 billion and $2.17 billion of underlying gross VOCRs and related assets (which legally are not assets of the Company) as of September 30, 2022 and December 31, 2021.
(b)The carrying amounts of the term notes are net of deferred financing costs of $18 million as of both September 30, 2022 and December 31, 2021.
(c)The Company has a borrowing capacity of $600 million under the USD bank conduit facility through July 2024. Borrowings under this facility are required to be repaid as the collateralized receivables amortize but no later than August 2025.
(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 May 2025.
(e)The carrying amounts of the secured notes and term loan are net of unamortized discounts of $17 million and $20 million as of September 30, 2022 and December 31, 2021, and net of unamortized debt financing costs of $6 million and $8 million as of September 30, 2022 and December 31, 2021.
(f)The weighted average effective interest rate on borrowings from this facility was 6.37% and 3.19% as of September 30, 2022 and December 31, 2021.
(g)The weighted average effective interest rate on borrowings from this facility was 3.34% and 2.39% as of September 30, 2022 and December 31, 2021.
(h)Includes $1 million and $2 million of unamortized gains from the settlement of a derivative as of September 30, 2022 and December 31, 2021.
(i)Includes $3 million and $4 million of unamortized losses from the settlement of a derivative as of September 30, 2022 and December 31, 2021.
(j)Includes $8 million and $9 million of unamortized gains from the settlement of a derivative as of September 30, 2022 and December 31, 2021.
Sierra Timeshare 2022-1 Receivables Funding LLC
On March 23, 2022, the Company closed on a placement of a series of term notes payable, issued by Sierra Timeshare 2022-1 Receivables Funding LLC, with an initial principal amount of $275 million, secured by VOCRs and bearing interest at a weighted average coupon rate of 3.84%. The advance rate for this transaction was 98%.
Sierra Timeshare 2022-2 Receivables Funding LLC
On July 21, 2022, the Company closed on a placement of a series of term notes payable, issued by Sierra Timeshare 2022-2 Receivables Funding LLC, with an initial principal amount of $275 million, secured by VOCRs and bearing interest at a weighted average coupon rate of 5.7%. The advance rate for this transaction was 90.5%.
USD Bank Conduit Renewal
On March 4, 2022, the Company renewed its USD timeshare receivables conduit facility, extending the end of the commitment period from October 2022 to July 2024. The renewal included a reduction of the USD borrowing capacity from $800 million to $600 million. The facility bears interest based on a mixture of variable commercial paper rates plus a spread for certain participating banks and the Daily Simple Secured Overnight Financing Rate (“SOFR”) plus a spread for other participating banks.
Maturities and Capacity
The Company’s outstanding debt as of September 30, 2022, matures as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Non-recourse Vacation Ownership Debt | | Debt | | Total |
| Within 1 year | $ | 275 | | | $ | 407 | | | $ | 682 | |
| Between 1 and 2 years | 199 | | | 306 | | | 505 | |
| Between 2 and 3 years | 421 | | | 282 | | | 703 | |
| Between 3 and 4 years | 195 | | | 991 | | | 1,186 | |
| Between 4 and 5 years | 201 | | | 417 | | | 618 | |
| Thereafter | 591 | | | 988 | | | 1,579 | |
| $ | 1,882 | | | $ | 3,391 | | | $ | 5,273 | |
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 September 30, 2022, available capacity under the Company’s borrowing arrangements was as follows (in millions):
| | | | | | | | | | | |
| Non-recourse Conduit Facilities (a) | | Revolving Credit Facilities (b) |
| Total capacity | $ | 787 | | | $ | 1,000 | |
| Less: outstanding borrowings | 371 | | | 12 | |
| | | |
| Available capacity | $ | 416 | | | $ | 988 | |
(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 original financial ratio covenants consist of a minimum interest coverage ratio of no less than 2.50 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.
As a precautionary measure during 2020, the Company amended the credit agreement governing its revolving credit facility and term loan B (“First Amendment”). The First Amendment provided flexibility during a relief period spanning from July 15, 2020 through April 1, 2022, or upon earlier termination by the Company (“Relief Period”). Among other changes, the First Amendment established Relief Period restrictions regarding share repurchases, dividends, and acquisitions. During 2021, the Company renewed the credit agreement governing the revolving credit facilities and term loan B (“Second Amendment”). The Second Amendment terminated the Relief Period and the aforementioned Relief Period restrictions. Additionally, the Second Amendment stipulated a first lien leverage ratio financial covenant not to exceed 4.75 to 1.0 which commenced with the December 31, 2021 period and extended through June 30, 2022, after which time it returned to 4.25 to 1.0 and reestablished the interest coverage ratio (as defined in the credit agreement) of no less than 2.50 to 1.0, the levels in place prior to COVID-19. The Second Amendment also reestablished the tiered pricing grid that was in place prior to COVID-19.
As of September 30, 2022, the Company’s interest coverage ratio was 4.72 to 1.0 and the first lien leverage ratio was 3.72 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 September 30, 2022, the Company was in compliance with the financial covenants described above.
As a result of the Company’s first lien leverage ratio decreasing below 3.75 to 1.0 as of June 30, 2022, the interest rate on revolver borrowings and fees associated with letters of credit decreased 25 basis points in the third quarter of 2022, and will remain at this level for the fourth quarter of 2022 given the Company’s first lien leverage ratio of 3.72 to 1.0 at September 30, 2022. The interest rate on revolver borrowings and fees associated with letters of credit are subject to future decreases or increases based on the Company’s first lien leverage ratio.
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 September 30, 2022, all of the Company’s securitized loan pools were in compliance with applicable contractual triggers.
Interest Expense
The Company incurred interest expense of $48 million and $143 million during the three and nine months ended September 30, 2022, excluding non-recourse vacation ownership debt. These amounts include offsets of less than $1 million and $1 million of capitalized interest during three and nine months ended September 30, 2022. Cash paid related to such interest was $135 million during the nine months ended September 30, 2022.
The Company incurred interest expense of $47 million and $147 million during the three and nine months ended September 30, 2021, excluding non-recourse vacation ownership debt, and including offsets of less than $1 million of capitalized interest during each period. Cash paid related to such interest was $160 million during the nine months ended September 30, 2021.
Interest expense incurred in connection with the Company’s non-recourse vacation ownership debt was $20 million and $55 million during the three and nine months ended September 30, 2022, and $19 million and $63 million during the three and nine months ended September 30, 2021, and is recorded within Consumer financing interest on the Condensed Consolidated Statements of Income. Cash paid related to such interest was $39 million and $44 million for the nine months ended September 30, 2022 and 2021.
11. Variable Interest Entities
The Company analyzes its variable interests, including loans, guarantees, interests in special purpose entities (“SPEs”), and equity investments, to determine if an entity in which the Company has a variable interest is a variable interest entity (“VIE”). If the entity is deemed to be a VIE, the Company consolidates those VIEs for which the Company 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):
| | | | | | | | | | | |
| September 30,
2022 | | December 31,
2021 |
Securitized contract receivables, gross (a) | $ | 2,031 | | | $ | 2,061 | |
Securitized restricted cash (b) | 85 | | | 84 | |
Interest receivables on securitized contract receivables (c) | 16 | | | 17 | |
Other assets (d) | 21 | | | 4 | |
| Total SPE assets | 2,153 | | | 2,166 | |
Non-recourse term notes (e) (f) | 1,511 | | | 1,614 | |
Non-recourse conduit facilities (e) | 371 | | | 320 | |
Other liabilities (g) | 3 | | | 2 | |
| Total SPE liabilities | 1,885 | | | 1,936 | |
| SPE assets in excess of SPE liabilities | $ | 268 | | | $ | 230 | |
(a)Included in Vacation ownership contract receivables, net on the Condensed Consolidated Balance Sheets.
(b)Included in Restricted cash on the Condensed Consolidated Balance Sheets.
(c)Included in Trade receivables, net on the Condensed Consolidated Balance Sheets.
(d)Primarily includes deferred financing costs for the bank conduit facility and a security investment asset, which is included in Other assets on the Condensed Consolidated Balance Sheets.
(e)Included in Non-recourse vacation ownership debt on the Condensed Consolidated Balance Sheets.
(f)Includes deferred financing costs of $18 million as of both September 30, 2022 and December 31, 2021, 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 $866 million and $758 million as of September 30, 2022 and December 31, 2021.
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):
| | | | | | | | | | | |
| September 30,
2022 | | December 31,
2021 |
| SPE assets in excess of SPE liabilities | $ | 268 | | | $ | 230 | |
| Non-securitized contract receivables | 866 | | | 758 | |
| Less: allowance for loan losses | 539 | | | 510 | |
| Total, net | $ | 595 | | | $ | 478 | |
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 interest rate caps and foreign exchange forward contracts.
As of September 30, 2022, the Company had foreign exchange contracts resulting in $2 million of liabilities which are included in 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 September 30, 2022 and 2021.
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):
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Carrying
Amount | | Estimated Fair Value | | Carrying
Amount | | Estimated Fair Value |
| Assets | | | | | | | |
| Vacation ownership contract receivables, net (Level 3) | $ | 2,358 | | | $ | 2,630 | | | $ | 2,309 | | | $ | 2,858 | |
| Liabilities | | | | | | | |
| Debt (Level 2) | $ | 5,273 | | | $ | 4,921 | | | $ | 5,313 | | | $ | 5,514 | |
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).
During 2019, the Company closed on the sale of its North American vacation rentals business for $162 million. After customary closing adjustments, the Company received $156 million in cash and $10 million in Vacasa LLC (“Vacasa”) equity. During the fourth quarter of 2021, Vacasa merged with a publicly traded special purpose acquisition company and began trading on the Nasdaq Global Select market. As of December 31, 2021, the fair value of the Company’s investment in Vacasa was $13 million, as measured using quoted prices in the active market (Level 1). During the third quarter of 2022, to Company sold all of its equity in Vacasa for $8 million. The sale resulted in a $3 million gain for the three months ended September 30, 2022 and a $5 million loss for the nine months ended September 30, 2022, which were included within Other income, net on the Condensed Consolidated Statements of Income.
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 sterling, Australian and Canadian dollars, and 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 and payables. 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 and forecasted earnings of foreign subsidiaries. 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 September 30, 2022 and 2021, the Company had no interest rate derivatives designated as fair value or cash flow hedges.
There were no losses on derivatives recognized in AOCL for the three and nine months ended September 30, 2022 or 2021.
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 2018. 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 28.5% and 27.9% for the three months ended September 30, 2022 and 2021; and 27.6% and 27.2% for the nine months ended September 30, 2022 and 2021. The effective tax rate for the three months ended September 30, 2022 was impacted by the reversal of a prior year tax receivable due to a statute of limitation expiration and a tax deficiency from stock-based compensation. The effective tax rate for the nine months ended September 30, 2022 was impacted by a decrease in unrecognized tax benefits for a tax position effectively settled with taxing authorities, partially offset by the reversal of a prior year tax receivable due to a statute of limitation expiration and a tax deficiency from stock-based compensation. The effective tax rate for the three months ended September 30, 2021 was impacted by additions to unrecognized tax benefits and the remeasurement of net deferred tax liabilities as a result of changes in certain state and foreign tax rates. For the nine months ended September 30, 2021, the effective tax rate was impacted by additions to unrecognized tax benefits and the remeasurement of net deferred tax liabilities as a result of changes in certain state and foreign tax rates partially offset by excess tax benefits from stock-based compensation.
The Company made income tax payments, net of tax refunds, of $110 million and $91 million during the nine months ended September 30, 2022 and 2021.
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.
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 information related to the lease costs for finance and operating leases (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Operating lease cost | $ | 6 | | | $ | 5 | | | $ | 17 | | | $ | 17 | |
| | | | | | | |
| Short-term lease cost | $ | 3 | | | $ | 3 | | | $ | 10 | | | $ | 10 | |
| | | | | | | |
| Finance lease cost: | | | | | | | |
| Amortization of right-of-use assets | $ | 1 | | | $ | 1 | | | $ | 4 | | | $ | 3 | |
| Interest on lease liabilities | — | | | — | | | — | | | — | |
| Total finance lease cost | $ | 1 | | | $ | 1 | | | $ | 4 | | | $ | 3 | |
The table below presents the lease-related assets and liabilities recorded on the Condensed Consolidated Balance Sheets:
| | | | | | | | | | | | | | | | | |
| Balance Sheet Classification | | September 30,
2022 | | December 31, 2021 |
| Operating leases (in millions): | | | | | |
| Operating lease right-of-use assets | Other assets | | $ | 63 | | | $ | 79 | |
| Operating lease liabilities | Accrued expenses and other liabilities | | $ | 114 | | | $ | 136 | |
| | | | | |
| Finance leases (in millions): | | | | | |
Finance lease assets (a) | Property and equipment, net | | $ | 11 | | | $ | 10 | |
| Finance lease liabilities | Debt | | $ | 9 | | | $ | 9 | |
| | | | | |
| Weighted average remaining lease term: | | | | | |
| Operating leases | | | 5.8 years | | 6.4 years |
| Finance leases | | | 2.7 years | | 2.6 years |
| Weighted average discount rate: | | | | | |
Operating leases (b) | | | 5.8 | % | | 5.8 | % |
| Finance leases | | | 4.8 | % | | 4.4 | % |
(a)Presented net of accumulated depreciation.
(b)Upon adoption of the 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):
| | | | | | | | | | | |
| Nine Months Ended |
| September 30, |
| 2022 | | 2021 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Operating cash flows from operating leases | $ | 24 | | | $ | 28 | |
| Operating cash flows from finance leases | $ | — | | | $ | — | |
| Financing cash flows from finance leases | $ | 4 | | | $ | 3 | |
| Right-of-use assets obtained in exchange for lease obligations: | | | |
Operating leases (a) | $ | (1) | | | $ | 6 | |
| Finance leases | $ | 5 | | | $ | 3 | |
(a)Includes write-off of right-of-use assets during the nine months ended September 30, 2022.
The table below presents maturities of lease liabilities as of September 30, 2022 (in millions):
| | | | | | | | | | | |
| Operating Leases | | Finance
Leases |
| Three months ending December 31, 2022 | $ | 8 | | | $ | 2 | |
| 2023 | 30 | | | 5 | |
| 2024 | 28 | | | 3 | |
| 2025 | 23 | | | 2 | |
| 2026 | 13 | | | — | |
| Thereafter | 34 | | | — | |
| Total minimum lease payments | 136 | | | 12 | |
| Less: amount of lease payments representing interest | (22) | | | (3) | |
| Present value of future minimum lease payments | $ | 114 | | | $ | 9 | |
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 Co. Litigation
The Company may from time to time be 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 where appropriate, 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 $19 million as of September 30, 2022 and December 31, 2021. Litigation is inherently unpredictable and, although the Company believes that its accruals are adequate and/or that it has valid defenses in these matters, unfavorable results could occur. As such, an adverse outcome from such proceedings for which claims are awarded in excess of the amounts accrued, if any, could be material to the Company with respect to earnings and/or cash flows in any given reporting period. As of September 30, 2022, it is estimated that the potential exposure resulting from adverse outcomes of such legal proceedings could, in the aggregate, range up to $13 million in excess of recorded accruals. Such accruals are exclusive of matters relating to the Company’s separation from Cendant, matters relating to the Spin-off, and matters relating to the sale of the vacation rentals businesses, which are discussed in Note 22—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.
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 22—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 | | | | Accumulated |
| Currency | | (Losses)/Gains | | | | Other |
| Translation | | on Cash Flow | | | | Comprehensive |
| Pretax | Adjustments | | Hedges | | | | (Loss)/Income |
| Balance, December 31, 2021 | $ | (145) | | | $ | (1) | | | | | $ | (146) | |
| Other comprehensive loss | (67) | | | — | | | | | (67) | |
| | | | | | | |
| Balance, September 30, 2022 | $ | (212) | | | $ | (1) | | | | | $ | (213) | |
| | | | | | | | | | | | | | | | | | | |
| Tax | | | | | | | |
| Balance, December 31, 2021 | $ | 97 | | | $ | 1 | | | | | $ | 98 | |
| Other comprehensive income | 3 | | | — | | | | | 3 | |
| | | | | | | |
| Balance, September 30, 2022 | $ | 100 | | | $ | 1 | | | | | $ | 101 | |
| | | | | | | | | | | | | | | | | | | |
| Net of Tax | | | | | | | |
| Balance, December 31, 2021 | $ | (48) | | | $ | — | | | | | $ | (48) | |
| Other comprehensive loss | (64) | | | — | | | | | (64) | |
| | | | | | | |
| Balance, September 30, 2022 | $ | (112) | | | $ | — | | | | | $ | (112) | |
| | | | | | | | | | | | | | | | | | | |
| Foreign | | Unrealized | | | | Accumulated |
| Currency | | (Losses)/Gains | | | | Other |
| Translation | | on Cash Flow | | | | Comprehensive |
| Pretax | Adjustments | | Hedges | | | | (Loss)/Income |
| Balance, December 31, 2020 | $ | (113) | | | $ | (1) | | | | | $ | (114) | |
| Other comprehensive loss | (27) | | | — | | | | | (27) | |
| | | | | | | |
| Balance, September 30, 2021 | $ | (140) | | | $ | (1) | | | | | $ | (141) | |
| | | | | | | | | | | | | | | | | | | |
| Tax | | | | | | | |
| Balance, December 31, 2020 | $ | 97 | | | $ | 1 | | | | | $ | 98 | |
| Other comprehensive income | 1 | | | — | | | | | 1 | |
| | | | | | | |
| Balance, September 30, 2021 | $ | 98 | | | $ | 1 | | | | | $ | 99 | |
| | | | | | | | | | | | | | | | | | | |
| Net of Tax | | | | | | | |
| Balance, December 31, 2020 | $ | (16) | | | $ | — | | | | | $ | (16) | |
| Other comprehensive loss | (26) | | | — | | | | | (26) | |
| | | | | | | |
| Balance, September 30, 2021 | $ | (42) | | | $ | — | | | | | $ | (42) | |
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.
There were no reclassifications out of AOCL for the nine months ended September 30, 2022 or 2021.
18. Stock-Based Compensation
The Company has a stock-based compensation plan available to grant RSUs, PSUs, 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 September 30, 2022, 10.8 million shares remain available.
Incentive Equity Awards Granted by the Company
During the nine months ended September 30, 2022, the Company granted incentive equity awards to key employees and senior officers of $32 million in the form of RSUs and $13 million in the form of PSUs. Of these awards, the majority of RSUs will vest ratably over a period of four years. The majority of PSUs will cliff vest on the third anniversary of the grant date, contingent upon the Company achieving certain performance metrics.
During the nine months ended September 30, 2021, the Company granted incentive equity awards to key employees and senior officers of $34 million in the form of RSUs, $7 million in the form of PSUs, and $2 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 nine months ended September 30, 2022, consisted of the following (in millions, except grant prices):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance, December 31, 2021 | | Granted | | Vested /Exercised (a) | | Cancelled / Forfeited (b) | | Balance, September 30, 2022 | |
| RSUs | | | | | | | | | | | |
| Number of RSUs | | 1.8 | | | 0.6 | | | (0.5) | | | (0.2) | | | 1.7 | | (c) |
| Weighted average grant price | | $ | 47.83 | | | $ | 49.90 | | | $ | 47.53 | | | $ | 47.73 | | | $ | 49.06 | | |
| | | | | | | | | | | |
| PSUs | | | | | | | | | | | |
| Number of PSUs | | 0.4 | | | 0.3 | | | — | | | (0.2) | | | 0.5 | | (d) |
| Weighted average grant price | | $ | 48.18 | | | $ | 52.87 | | | $ | — | | | $ | 43.04 | | | $ | 51.27 | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| NQs | | | | | | | | | | | |
| Number of NQs | | 2.3 | | | — | | | — | | | — | | | 2.3 | | (e) |
| Weighted average grant price | | $ | 45.32 | | | $ | — | | | $ | — | | | $ | — | | | $ | 45.35 | | |
(a)Upon exercise of NQs and upon vesting of RSUs and PSUs, the Company issues new shares to participants.
(b)The Company recognizes cancellations and forfeitures as they occur.
(c)Aggregate unrecognized compensation expense related to RSUs was $55 million as of September 30, 2022, which is expected to be recognized over a weighted average period of 2.6 years.
(d)Aggregate unrecognized compensation expense related to PSUs that are probable of vesting was $15 million as of September 30, 2022, which is expected to be recognized over a weighted average period of 2.2 years. The maximum amount of compensation expense associated with PSUs that are not probable of vesting could range up to $19 million over a weighted average period of 1.6 years.
(e)There were 1.4 million NQs which were exercisable as of September 30, 2022. These exercisable NQs will expire over a weighted average period of 6.4 years and carry a weighted average grant date fair value of $8.52. Unrecognized compensation expense for NQs was $5 million as of September 30, 2022, which is expected to be recognized over a weighted average period of 1.9 years.
The Company did not grant any stock options during the nine months ended September 30, 2022. The fair value of stock options granted by the Company during 2021 was 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 |
| Grant date fair value | | | $18.87 |
| Grant date strike price | | | $59.00 |
| Expected volatility | | | 44.80% |
Expected life (a) | | | 6.25 years |
| Risk-free interest rate | | | 1.09% |
| Projected dividend yield | | | 3.12% |
(a)The maximum contractual term for these options is 10 years.
The total intrinsic value of exercised options was less than $1 million during the nine months ended September 30, 2022, and $1 million during the nine months ended September 30, 2021. The grant date fair value of options that vested during the nine months ended September 30, 2022 and 2021 was $4 million in both periods.
Stock-Based Compensation Expense
The Company recorded stock-based compensation expense related to incentive equity awards granted to key employees, senior officers, and non-employee directors of $10 million and $34 million during the three and nine months ended
September 30, 2022, and $8 million and $24 million during the three and nine months ended September 30, 2021. Such stock-based compensation expense for the nine months ended September 30, 2022 includes $3 million which has been classified within Restructuring on the Condensed Consolidated Statements of Income. The Company recognized $9 million and $6 million of associated tax benefits during the nine months ended September 30, 2022 and 2021.
The Company paid $7 million and $9 million of taxes for the net share settlement of incentive equity awards that vested during the nine months ended September 30, 2022 and 2021. Such amounts are included within Financing activities on the Condensed Consolidated Statements of Cash Flows.
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 issuances under this plan during the nine months ended September 30, 2022 and 2021.
19. Segment Information
The Company has two reportable segments: Vacation Ownership and Travel and Membership. Due to changes in organizational structure in the second quarter of 2022, the management of Extra Holidays was transitioned to the Vacation Ownership segment. As such, the Company reclassified the results of Extra Holidays, which was previously reported within the Travel and Membership segment, into the Vacation Ownership segment. Prior period segment information has been updated to reflect this change. The reportable segments presented below are those for which discrete financial information is available and which are utilized on a regular basis by the 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 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 assets and liabilities related to acquisitions of continuing businesses and dispositions, including the separation of Wyndham Hotels & Resorts, Inc. 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 | | Nine Months Ended |
| September 30, | | September 30, |
| Net revenues | 2022 | | 2021 | | 2022 | | 2021 |
| Vacation Ownership | $ | 754 | | | $ | 665 | | | $ | 2,098 | | | $ | 1,722 | |
| Travel and Membership | 183 | | | 175 | | | 572 | | | 544 | |
| Total reportable segments | 937 | | | 840 | | | 2,670 | | | 2,266 | |
Corporate and other (a) | — | | | (1) | | | (2) | | | (2) | |
| Total Company | $ | 937 | | | $ | 839 | | | $ | 2,668 | | | $ | 2,264 | |
| | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| Reconciliation of Net income to Adjusted EBITDA | 2022 | | 2021 | | 2022 | | 2021 |
| Net income attributable to Travel + Leisure Co. shareholders | $ | 116 | | | $ | 101 | | | $ | 266 | | | $ | 201 | |
| | | | | | | |
| | | | | | | |
| Loss on disposal of discontinued business, net of income taxes | — | | | — | | | — | | | 2 | |
| Provision for income taxes | 46 | | | 39 | | | 101 | | | 76 | |
| Depreciation and amortization | 30 | | | 31 | | | 91 | | | 93 | |
| Interest expense | 48 | | | 47 | | | 143 | | | 147 | |
| Interest (income) | (2) | | | (1) | | | (3) | | | (1) | |
| Stock-based compensation | 10 | | | 8 | | | 31 | | | 24 | |
Restructuring (b) | — | | | — | | | 8 | | | (1) | |
COVID-19 related costs (c) | — | | | 1 | | | 2 | | | 3 | |
| | | | | | | |
| | | | | | | |
Asset recoveries, net (d) | — | | | — | | | (1) | | | — | |
| Legacy items | (1) | | | 2 | | | 1 | | | 6 | |
| (Gain)/loss on equity investment | (3) | | | — | | | 5 | | | — | |
| Fair value change in contingent consideration | (10) | | | — | | | (10) | | | — | |
| Adjusted EBITDA | $ | 234 | | | $ | 228 | | | $ | 634 | | | $ | 550 | |
| | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| Adjusted EBITDA | 2022 | | 2021 | | 2022 | | 2021 |
| Vacation Ownership | $ | 188 | | | $ | 181 | | | $ | 480 | | | $ | 386 | |
| Travel and Membership | 65 | | | 64 | | | 211 | | | 209 | |
| Total reportable segments | 253 | | | 245 | | | 691 | | | 595 | |
Corporate and other (a) | (19) | | | (17) | | | (57) | | | (45) | |
| Total Company | $ | 234 | | | $ | 228 | | | $ | 634 | | | $ | 550 | |
(a)Includes the elimination of transactions between segments.
(b)Includes $3 million of stock-based compensation expense for the nine months ended September 30, 2022, associated with the 2022 restructuring.
(c)Includes expenses related to COVID-19 testing and other expenses associated with the Company’s return-to-work program in 2022. In 2021, this includes severance and other employee costs associated with layoffs due to the COVID-19 workforce reduction offset in part by U.S. and international government employee retention credits.
(d)Includes $1 million of inventory impairments for the nine months ended September 30, 2022, included in Cost of vacation ownership interests on the Condensed Consolidated Statements of Income.
| | | | | | | | | | | |
Segment Assets (a) | September 30,
2022 | | December 31, 2021 |
| Vacation Ownership | $ | 4,797 | | | $ | 4,760 | |
| Travel and Membership | 1,347 | | | 1,397 | |
| Total reportable segments | 6,144 | | | 6,157 | |
| Corporate and other | 236 | | | 431 | |
| | | |
| Total Company | $ | 6,380 | | | $ | 6,588 | |
(a)Excludes investment in consolidated subsidiaries.
20. COVID-19 Related Items
During the three months ended September 30, 2022, the Company had no expenses directly related to COVID-19. During the nine months ended September 30, 2022, the Company had $2 million of employee compensation related and other expenses at its corporate operations directly related to COVID-19.
During the three months ended September 30, 2021, the Company had the following (benefits)/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 | | $ | (21) | | | $ | — | | | $ | — | | | $ | (21) | | | Vacation ownership interest sales |
| Recoveries | | 8 | | | — | | | — | | | 8 | | | Cost of vacation ownership interests |
| | | | | | | | | | |
| Employee compensation related and other | | 1 | | | — | | | — | | | 1 | | | COVID-19 related costs |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Total COVID-19 | | $ | (12) | | | $ | — | | | $ | — | | | $ | (12) | | | |
During the nine months ended September 30, 2021, the Company had the following (benefits)/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 | | $ | (47) | | | $ | — | | | $ | — | | | $ | (47) | | | Vacation ownership interest sales |
| Recoveries | | 17 | | | — | | | — | | | 17 | | | Cost of vacation ownership interests |
| | | | | | | | | | |
| Employee compensation related and other | | 2 | | | — | | | 1 | | | 3 | | | COVID-19 related costs |
| | | | | | | | | | |
| | | | | | | | | | |
| Lease related | | (1) | | | — | | | — | | | (1) | | | Restructuring |
| Total COVID-19 | | $ | (29) | | | $ | — | | | $ | 1 | | | $ | (28) | | | |
Allowance for loan losses - Due to the economic downturn resulting from COVID-19 during 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. During 2020, the total impact of this COVID-19 related allowance and subsequent adjustments resulted in a $205 million COVID-19 related provision, which was reflected as a reduction to Vacation ownership interest sales and $48 million of estimated recoveries, which were reflected as a reduction to Cost of vacation ownership interests on the Consolidated Statements of Income. During the three and nine months ended September 30, 2021, the Company analyzed the adequacy of this COVID-19 related allowance
consistent with past methodology, and due to the improvement in net new defaults the Company reduced this allowance resulting in increases of $21 million and $47 million to Vacation ownership interest sales and corresponding increases of $8 million and $17 million to Cost of vacation ownership interests. The net positive impact of these adjustments on Adjusted EBITDA was $13 million and $30 million for the three and nine months ended September 30, 2021. Refer to Note 7—Vacation Ownership Contract Receivables for additional details.
Employee compensation related and other - During the nine months ended September 30, 2022, these costs were related to COVID-19 testing and other expenses associated with the Company’s return-to-work program.
During the three and nine months ended September 30, 2021, the Company incurred $1 million and $3 million of employee related costs associated with benefits continuation, inclusive of $2 million of employee retention credits earned in connection with government programs for the nine months ended September 30, 2021.
In connection with COVID-19 related actions taken by the Company, it recorded 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, 2021 | | Costs Recognized | | Cash Payments | | | | September 30,
2022 |
| COVID-19 employee-related | $ | 1 | | | $ | 2 | | | $ | (3) | | | | | $ | — | |
| $ | 1 | | | $ | 2 | | | $ | (3) | | | | | $ | — | |
Lease related - During the nine months ended September 30, 2021, the Company reversed $1 million of expense included in Restructuring on the Condensed Consolidated Statements of Income related to the reimbursement of prepayments that were previously written-off at the Vacation Ownership segment.
21. Restructuring
2022 Restructuring Plans
During the nine months ended September 30, 2022, the Company incurred $8 million of restructuring charges. These charges are associated with certain positions that were made redundant based upon changes to the organizational structure of the Company, primarily within the Travel and Membership segment. The charges consisted of (i) $6 million of personnel costs at the Travel and Membership segment (ii) $1 million of lease and personnel-related costs at the Vacation Ownership segment, and (iii) $1 million of personnel-related costs at the Company’s corporate operations. These restructuring charges included $3 million of accelerated stock-based compensation expense. All material initiative and related expenses have been incurred as of September 30, 2022. The 2022 restructuring liability was reduced by $3 million of cash payments during the nine months ended September 30, 2022. The majority of the remaining liability of $2 million is expected to be paid in 2023 with lease-related payments continuing through 2025.
2020 Restructuring Plans
During 2020, the Company recorded $37 million of restructuring charges, most of which were COVID-19 related. These charges included $22 million at the Travel and Membership segment associated with the Company’s decision to abandon the remaining portion of its administrative offices in New Jersey, and $14 million of lease-related charges due to the renegotiation of an agreement and facility-related restructuring charges associated with closed sales centers at the Vacation Ownership segment. As of December 31, 2021, this restructuring liability was $22 million which was reduced by $3 million of cash payments during the nine months ended September 30, 2022. The remaining 2020 restructuring liability of $19 million is lease-related and is expected to be paid by the end of 2029.
The activity associated with the Company’s restructuring plans is summarized as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability as of | | | | | | | | Liability as of |
| December 31, 2021 | | Costs Recognized | | Cash Payments | | Other | | September 30,
2022 |
| Facility-related | $ | 22 | | | $ | 1 | | | $ | (3) | | | $ | — | | | $ | 20 | |
| Personnel-related | — | | | 7 | | | (3) | | | (3) | | (a) | 1 | |
| | | | | | | | | |
| $ | 22 | | | $ | 8 | | | $ | (6) | | | $ | (3) | | | $ | 21 | |
(a)Represents $3 million of accelerated stock-based compensation expense for the nine months ended September 30, 2022, included in Additional paid-in capital on the Condensed Consolidated Balance Sheets.
22. 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, now Avis Budget Group), 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 Co. 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 September 30, 2022 and December 31, 2021, the Cendant separation and related liabilities were $15 million and $13 million, all of which were tax 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 Co. 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.
The Company and Wyndham Hotels entered into a letter agreement during 2021 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 the agreements governing the relationship between Travel + Leisure Co. and Wyndham Hotels, Travel + Leisure Co. assumed two-thirds and Wyndham Hotels assumed one-third of certain contingent corporate liabilities of the Company incurred prior to the Spin-off, 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 Co. 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 prior to the Spin-off.
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 Co. 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 September 30, 2022. 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 September 30, 2022. 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 £61 million ($81 million USD) on a perpetual basis. These guarantees totaled £35 million ($39 million USD) at September 30, 2022. Travel + Leisure Co. is responsible for two-thirds of these guarantees.
As part of this agreement Wyndham Hotels was required to maintain minimum credit ratings which increased to Ba1 for Moody’s Investors Services 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 would be shared two-thirds by Travel + Leisure Co. and one-third by Wyndham Hotels, as the selling entity, Travel + Leisure Co. was 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. During the third quarter of 2021, S&P upgraded Wyndham Hotels’ credit rating to BB+. In connection with the upgrade of Wyndham Hotels’ credit rating and as part of the settlement of other claims, the surety bond and letter of credit were released during the fourth quarter of 2021.
The estimated fair value of the guarantees and indemnifications for which Travel + Leisure Co. is responsible related to the sale of the European vacation rentals business at September 30, 2022, 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 £35 million ($44 million USD) related to the sale of the European vacation rentals business. During the fourth quarter of 2021, the Company entered into a settlement agreement which received regulatory approval during the third quarter of 2022 to settle these post-closing adjustment claims for £5 million ($6 million USD); one-third of which was the responsibility of Wyndham Hotels. During the third quarter of 2022, the Company made this settlement payment which was included within Net cash used in investing activities from discontinued operations on the Condensed Consolidated Statements of Cash Flows, and received $2 million from Wyndham Hotels for their one-third portion which was included within Net cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows. This matter is now resolved and no further payments are required.
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 against certain claims and assessments, including income tax and other tax matters related to the operations of the North American vacation 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 September 30, 2022.
In connection with the sale of the North American vacation 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 nine months ended September 30, 2021, 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 Other revenue on the Condensed Consolidated Statements of Income. These transition services ended in February 2021.
23. Related Party Transactions
In 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. In 2020, the Company acquired the completed vacation ownership property for $45 million. This agreement was subsequently amended during 2021, 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 related to this timesharing arrangement during the nine months ended September 30, 2022 and 2021.
24. Subsequent Event
Sierra Timeshare 2022-3 Receivables Funding LLC
On October 20, 2022, the Company closed on a placement of a series of term notes payable, issued by Sierra Timeshare 2022-3 Receivables Funding LLC, with an initial principal amount of $250 million, secured by VOCRs and bearing interest at a weighted average coupon rate of 6.91%. The advance rate for this transaction was 87.5%.
